The key ingredients of monetary systems:  Confidence and liquidity

Demands of an International Monetary System
    •A relatively stable exchange rate system
    •Coordinated macroeconomic policies
    •A lender of last resort in crises
    •A market for distressed goods
    •Countercyclical long-term lending
•Does this require a leader?

The Mundell-Fleming Theorem
    •You can have any two of these at the same time
        - Macroeconomic policy flexibility
        - Fixed exchange rates
        - Free movement of capital
    •But you can’t have all three

Monetary Theory and Monetary History
    •The Gold Standard
        - Fixed rates and free movement of capital
        - British leadership
    •Bretton Woods
        - Fixed rates and macroeconomic flexibility
        - American leadership
    •Floating exchange rates
        - Trading macroeconomic flexibility for capital flows

Monetary Theory and the Contemporary System
    •Mundell-Fleming:  Different countries are trying dfferent experiments
    •The US dollar is still the world’s reserve currency
    •Is the US still the world’s economic leader?

Exchange-Rate Politics
    •What should the value of a currency be?
    •Floating currencies and market valuation
    •The international currency market
        - Over a trillion dollars a day
    •BOP, inflation, expectations, confidence
    •PPP and the Big Mac index

International Currencies
    •Examples:
        - The Euro
        - The CFA Franc
        - The US dollar?
    •Costs and benefits:
        - Credibility
        - Gain in exchange efficiency
        - Loss in macroeconomic flexibility

International Financial Institutions (IFIs)
    •Common features:
        - Loans, not grants, and they expect to be paid back
        - Profit-generating
        - Corporate voting structures
    •Common criticisms:
        - Creating indebtedness
        - Skewing development
        - Exporting the US model of development

The IMF
    •Designed to maintain a fixed exchange rate system
    •After Bretton Woods, focused on BOP stabilization
    •Surveillance, financial assistance, technical assistance
        - Lending money, doing research, setting standard
    •Conditionality

The World Bank
    •Lends for development projects
    •5 components:
        - International Bank for Reconstruction and Development (IBRD)
        - International Development Association (IDA)
        - International Finance Corporation (IFC)
        - Multilateral Investment Guarantee Agency (MIGA)
        - International Centre for Settlement of Investment Disputes (ICSID)