The International Monetary System

This chapter aims to develop a basic understanding of the international monetary system. It presents a few central economic concepts and examines a bit of postwar exchange-rate history. The chapter explores one basic question: Why do we live in a world in which currency values fluctuate substantially from week to week, rather than in a world of more stable currencies? The answer we propose is that the international monetary system requires governments to choose between currency stability and national economic autonomy. An exchange-rate system is a set of rules governing how much national currencies can appreciate and depreciate in the foreign exchange market. There are two prototypical systems: fixed exchange-rate systems and floating exchange-rate systems. The balance of payments is an accounting device that records all international transactions between a particular country and the rest of the world for a given period. The United States had abandoned the central component of the Bretton Woods system.

Economics · Monetary economics · Monetary policy · Monetary system · Global Financial Crisis and Policies