Origin The IMF also called the Fund is an International monetary institution/ supranational financial institution established by 45 nations under the Bretton Woods Agreement of 1944. Such an institution was necessary to avoid repetition of the disastrous economic policies that had contributed to Great depression of 1930’s. The principal aim was to avoid the economic mistakes of the 1920s and 1930s. It started functioning from March 1, 1947. In June, 1996, the Fund had 181 members. The IMF was established to promote economic and financial co-operation among its members in order to facilitate the expansion and balanced growth of world trade. It performs the activities like monitoring national, global and regional economic developments and advising member countries on their economic policies (surveillance); lending member hard currencies to support policy programmes designed to correct BOP problems; offering technical assistance in its areas of expertise as well as training for government and Continue reading
International Finance
International finance is the branch of economics that studies the dynamics of foreign exchange,foreign direct investment and how these affect international trade. Also studies the international projects, international investment and the international capital flow .International Finance can be broadly defined, as the study of the financial decisions taken by a multinational corporation in the area of international business i.e. global corporate finance. International finance draws much of its background from the preliminary studies in the topics of corporate finance such as capital budgeting, portfolio theory and cost of capital but now viewed in the international dimension.
Is there an Optimal Exchange Rate Regime?
Starting from the gold standard regime of fixed rates, passing through the adjustable peg system after the Second World War, it has finally ended up with a system of managed floats after 1973. Since 1985, the pendulum has started swinging, though very slowly and erratically, in the direction of introducing some amount of fixity and rule based management of exchange rates. Despite these empirical facts, there is a school of thought within the professional which argues that in the years to come there will be only two types of exchange rate regimes: truly fixed rate arrangements like currency unions or currency boards, or truly market determined, independently floating exchange rates. The “middle ground” — regimes such as adjustable pegs, crawling pegs, crawling bands and managed floating — will pass into history. Some analysts even predict that three currency blocks — the US dollar block, the Euro block and the Yen Continue reading
The Current Scenario of Exchange Rate Regimes
Now the IMF classifies member countries into eight categories according to the Exchange rate regime they have adopted. A brief summary of IMF’s classification is given below: 1. No Separate Legal Tender Arrangement This group includes a) Countries which are members of a currency union and share a common currency like the twelve members of the European Currency Union (ECU), who have adopted Euro as their common currency or b) Countries which have adopted the currency of another country as their currency. IMF’s 1999 Annual Report on Exchange Arrangements and Exchange Restrictions indicates that 37 countries belong to this category. 2. Currency Board Arrangement A regime under which there is a legislative commitment to exchange the domestic currency against a specific foreign currency at a fixed exchange rate coupled with restrictions on the monetary authority to ensure that this commitment will be honored. This implies constraints on the ability of Continue reading
Exchange Rate Regimes: The Bretton Woods System
Bretton Woods is the name of the town in the state of New Hampshire, USA, where the delegations from over forty five countries met in 1944 to deliberate on proposals for a post-war international monetary system. The two main contending proposals were “the White plan” named after Harry Dexter White of the US Treasury and the “Keynes plan” whose architect was Lord Keynes of the UK. Following the Second World War, policy makers from victorious allied powers, principally the US and UK, took up the task of thoroughly revamping the world monetary system for the non-communist world. The outcome was the so called “Bretton Woods System” and the birth of new supra-national institutions, the International Monetary Fund (the IMF or simply the “Fund”) and the World Bank. Under this system US Dollar was the only currency that was fully convertible to gold; where other countries currencies were not directly convertible Continue reading
Exchange Rate Regimes: International Gold Standard (1875- 1914)
Though in Great Britain currency notes from the Bank of England were made fully redeemable for gold during 1821, the first full-fledged gold standard was adopted by France  in 1878. Later on United States adopted it in 1879 and Russia and Japan in 1897, Switzerland, and many Scandinavian countries by 1928. An international Gold Standard is said to exist when; Gold alone is assured of unrestricted coinage There is a  two way convertibility between gold and national currencies at a stable ratio And gold may be freely imported and exported. In order to support unrestricted convertibility into gold, bank notes need to be backed by gold reserve of a minimum stated ratio. In addition, the domestic money stock should rise and fall as gold flows in and out of the country. In a version called Gold Specie Standard, the actual currency in circulation consists of gold coins with Continue reading
Foreign Exchange Risk or FOREX Risk
Foreign Exchange dealing is a business that one get involved in, primarily to obtain protection against adverse rate movements on their core international business. Foreign Exchange dealing is essentially a risk-reward business where profit potential is substantial but it is extremely risky too. Foreign exchange business has the certain peculiarities that make it a very risky business. These would include: Forex deals are across country borders and therefore, often foreign currency prices are subject to controls and restrictions imposed by foreign authorities. Needless to say, these controls and restrictions are invariably dictated by their own domestic factors and economy. Forex deals involve two currencies and therefore, rates are influenced by domestic as well as international factors. The Forex market is a 24-hour global market and overseas developments can affect rates significantly. The Forex market has great depth and numerous players shifting vast sums of money. Forex rates therefore, can move Continue reading