International Finance Theory and Policy
by Steven M. Suranovic

Finance 100-0

International Monetary System: Case Studies : Overview

Overview

This section provides a discussion of a variety of topics and issues in international finance.

It begins with the breakup of the Bretton-Woods system of fixed exchange rates. This was a gold-exchange standard that operated from 1945 until 1973. The story of its breakup provides an important lesson on how fixed exchange rate regimes can fail.

The following issues are currently being written and will be added as they become available.

The International Monetary Fund (IMF) was established to help the Bretton-Woods fixed exchange rate system function smoothly. Its mission continues today despite the breakup of Bretton-Woods and it has had a profound influence, many say profoundly negative, upon many different countries. Understanding its role today is a very important element of international finance.

The Third World debt crisis of the early 1980s was concentrated in Latin America but eventually spread to Africa and elsewhere. It provides important lessons about how international indebtedness can get out of hand and lead to severe internal repercussions.

In 1979 the European Union began to link its currencies together by fixing them within narrow bands using the Exchange Rate Mechanism. Their experience provides some very useful lessons about how fixed exchange rates can help reduce inflation and the importance of monetary autonomy.

The Mexican peso crisis occurred just after the North American free trade agreement was implemented in 1995. That crisis was alleviated by a massive bailout by the US and raised important issues dealing with contagion and moral hazard.

The Asian currency crisis of 1997 was an excellent example of spreading contagion as capital flight from Thailand eventually spread to Malaysia, Indonesia, South Korea, the Philippines and eventually to Russia. This crisis raises important issues about the pros and cons of free capital mobility and its impact on domestic economies.

Currency boards have been one infrequently used method for countries to legislatively fix their currencies to another. Prominent examples of their use include Argentina and Hong Kong.

Finally, another new experiment with fixed exchange rates is the choice of dollarization. Recently both Ecuador and El Salvador have chosen to dollarize. The implications of this choice and their experiences are considered in this section.

International Finance Theory and Policy - Chapter 100-0: Last Updated on 12/2/05

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