IMF Agreements and Exchange Rate Regimes

Jamaica Agreement

• Flexible exchange rates were declared acceptable to IMF members
• Central banks were allowed to intervene in exchange markets to iron out unwarranted volatilities
• Gold was officially abandoned (demonetized) as an international reserve asset
• Non-oil-exporting countries and less-developed countries were given greater access to IMF funds

Exchange Rate Regimes

• Fixed or pegged exchange rate regime:
  • Attaches the value of a country's currency to another currency, a basket of currencies, or a measure of value (e.g. gold)
  • Pros: reduces currency risk and speculation, promotes stable international trade, promotes investment
  • Cons: limits economic flexibility, might require high foreign reserves, can lead to balance of payment deficits or surpluses
• Flexible or floating exchange rate regime:
  • Value of a country's currency is determined by the open market through supply and demand
  • Pros: allows automatic adjustment to economic conditions, provides independence to domestic monetary policy, facilitates capital mobility
  • Cons: creates uncertainty due to unpredictability, can lead to high inflation due to depreciation, potential for competitive devaluation
• Crawling pegs: a system where the exchange rate is adjusted gradually over time to correct for inflation or other economic changes

International Monetary System Evolution

• Bimetallism (before 1875): both gold and silver were used as international means of payment and exchange rates were determined by their gold or silver contents
• Classical gold standard (1875-1914): gold alone was assured of unrestricted coinage, with two-way convertibility between gold and national currencies at a stable ratio
• Interwar period (1915-1944): economic nationalism, attempts to restore the gold standard failed, economic and political instabilities, bank failures, and panicky flights of capital across borders
• Bretton Woods system (1945-1972): dollar-based gold-exchange standard, established by the IMF
• Flexible exchange rate regime (since 1973): IMF members met in Jamaica and agreed to a new set of rules for the international monetary system

International Finance

• Concerned with topics such as foreign direct investment, currency exchange rates, and financial management
• Involve issues pertaining to political and foreign exchange risk, managing multinational corporations, foreign exchange exposure, foreign direct investment decisions, and multinational capital budgeting
• Importance of international finance stems from the highly globalized and integrated world economy
• Three major dimensions set international finance apart from domestic finance:
  • Foreign exchange and political risks
  • Market imperfections
  • Expanded opportunity set

This quiz covers the key elements of the Jamaica Agreement, including flexible exchange rates, demonetization of gold, and IMF fund access for non-oil-exporting countries. It also introduces exchange rate regimes.