International Monetary System
International Monetary System refers to the institutional arrangements that govern the exchange rates. There are four mechanism of which the exchange rate is governed to:
Floating exchange rate * when the foreign exchange market determines the relative value of a currency * Example: four of the world’s major trading currency i.e. the USD, Euro, Yen and Pound are all free to trade against each other. The exchange rates are determined by market forces and fluctuate against each other on day to day or even minute to minute basis.
Pegged exchange rate * Means the value of the currency if pegged/ fixed relative to a reference currency, for example Macau has pegged its exchange rate to the Hong Kong dollar, which in turn is pegged to the USD. * Malaysia also decided to peg the Ringgit against USD in the attempt to prevent the currency from further devalue during financial crisis is 1997
Dirty float * A system under which a country’s currency is nominally allowed to float freely against other currencies, but government will intervene in buying and selling currency when they believe that the currency has deviated too far from its value * China has adopted this policy since July 2005. The value of the Yuan has been linked to a basket of other currencies including dollar, yen and euro only within tight limits. It is believed that Chinese are deliberately holding the value of their currency to promote exports
Fixed exchange rate * Values of a set of currencies are fixed against each other at some mutually agreed on exchange rate. * This policy however has collapsed in 1973
European monetary system * A system to regulate fixed exchange rates before the introduction of the euro.
Gold Standard
Usage of gold coins as a medium of exchange, unit of account and a store of value
1. Mechanism of the gold standard
Pegging currencies to gold and guaranteeing convertibility is what the gold standard is about. By 1880, it has been
Floating exchange rate * when the foreign exchange market determines the relative value of a currency * Example: four of the world’s major trading currency i.e. the USD, Euro, Yen and Pound are all free to trade against each other. The exchange rates are determined by market forces and fluctuate against each other on day to day or even minute to minute basis.
Pegged exchange rate * Means the value of the currency if pegged/ fixed relative to a reference currency, for example Macau has pegged its exchange rate to the Hong Kong dollar, which in turn is pegged to the USD. * Malaysia also decided to peg the Ringgit against USD in the attempt to prevent the currency from further devalue during financial crisis is 1997
Dirty float * A system under which a country’s currency is nominally allowed to float freely against other currencies, but government will intervene in buying and selling currency when they believe that the currency has deviated too far from its value * China has adopted this policy since July 2005. The value of the Yuan has been linked to a basket of other currencies including dollar, yen and euro only within tight limits. It is believed that Chinese are deliberately holding the value of their currency to promote exports
Fixed exchange rate * Values of a set of currencies are fixed against each other at some mutually agreed on exchange rate. * This policy however has collapsed in 1973
European monetary system * A system to regulate fixed exchange rates before the introduction of the euro.
Gold Standard
Usage of gold coins as a medium of exchange, unit of account and a store of value
1. Mechanism of the gold standard
Pegging currencies to gold and guaranteeing convertibility is what the gold standard is about. By 1880, it has been