Week 1 Lecture 1 Ch2 International Monetary System 
PowerPoint
to accompany
FIN 302 Finance (International)
Lecture 1:
THE INTERNATIONAL MONETORY SYSTEM
Learning objectives
1. Exchange rate related concepts
2. Types of Exchange Rate Systems
3. The concept of ideal currency or the impossible trinity.
4. Fixed rates vs. Floating rates
5. Brief History of International Monetary System
6. Monetary policy and Exchange Rates in
Australia
Exchange rate related concepts
• Exchange rate = the price of one currency in terms of another.
• Two Expressions of Exchange Rate direct: domestic currency/foreign currency indirect: foreign currency/domestic currency
• If you can buy a US dollar for AUS$0.9261, what is the relevant exchange rate? direct: AUS/US = 0.9261 indirect: US/AUS = 1/0.9261 = 1.0798
Exchange rate related concepts
Change in exchange rate
Fixed exchange rate system
Floating exchange rate system
Increase in the value of domestic currency per foreign currency
Revaluation
Appreciation
Decrease in the value of domestic currency per foreign currency
Devaluation
Depreciation
Attributes of the “Ideal” Currency
• Thee Impossible Trinity:
– Exchange rate stability
– Full financial integration
– Monetary independence
• The economic forces do not allow the simultaneous achievement of all three
Attributes of the “Ideal” Currency
(Page 36)
Types of Exchange Rate Systems
•
•
•
•
•
Floating
Managed Floating
Pegged or Crawling (3 subtypes)
Currency Boards
Exchange arrangement with no separate legal tender
(Dollarization)
Fixed Versus Flexible Exchange Rates
• Factors affecting to a nation’s choice of currency
•
•
•
•
•
inflation, unemployment, interest rate levels, trade balances, and economic growth.
• The choice between fixed and flexible rates may change over time as priorities change.
Fixed Versus Flexible
Exchange Rates
• Benefits of fixed rate regime
– stability in international prices
– inherent anti-inflationary nature of fixed prices
• Problems of fixed rate regime
– Need for central banks
to accompany
FIN 302 Finance (International)
Lecture 1:
THE INTERNATIONAL MONETORY SYSTEM
Learning objectives
1. Exchange rate related concepts
2. Types of Exchange Rate Systems
3. The concept of ideal currency or the impossible trinity.
4. Fixed rates vs. Floating rates
5. Brief History of International Monetary System
6. Monetary policy and Exchange Rates in
Australia
Exchange rate related concepts
• Exchange rate = the price of one currency in terms of another.
• Two Expressions of Exchange Rate direct: domestic currency/foreign currency indirect: foreign currency/domestic currency
• If you can buy a US dollar for AUS$0.9261, what is the relevant exchange rate? direct: AUS/US = 0.9261 indirect: US/AUS = 1/0.9261 = 1.0798
Exchange rate related concepts
Change in exchange rate
Fixed exchange rate system
Floating exchange rate system
Increase in the value of domestic currency per foreign currency
Revaluation
Appreciation
Decrease in the value of domestic currency per foreign currency
Devaluation
Depreciation
Attributes of the “Ideal” Currency
• Thee Impossible Trinity:
– Exchange rate stability
– Full financial integration
– Monetary independence
• The economic forces do not allow the simultaneous achievement of all three
Attributes of the “Ideal” Currency
(Page 36)
Types of Exchange Rate Systems
•
•
•
•
•
Floating
Managed Floating
Pegged or Crawling (3 subtypes)
Currency Boards
Exchange arrangement with no separate legal tender
(Dollarization)
Fixed Versus Flexible Exchange Rates
• Factors affecting to a nation’s choice of currency
•
•
•
•
•
inflation, unemployment, interest rate levels, trade balances, and economic growth.
• The choice between fixed and flexible rates may change over time as priorities change.
Fixed Versus Flexible
Exchange Rates
• Benefits of fixed rate regime
– stability in international prices
– inherent anti-inflationary nature of fixed prices
• Problems of fixed rate regime
– Need for central banks