international monetary system

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International monetary system

The global network of government and commercial institutions within which currency exchange rates are determined.

International Monetary System

In foreign exchange, the complete network of governments and institutions that affect currencies. The system has a set of agreed-upon rules that allows for international trade of goods and services. It is important to note that one government's decisions may affect the international monetary system. For example, many countries peg their currencies to the U.S. dollar; when the Federal Reserve makes changes to American monetary policy, it affects those currencies as well. Likewise, import and export laws and decisions on the convertibility of currencies have sometimes significant effects on the international monetary system. See also: Bretton Woods.
International monetary systemclick for a larger image
Fig. 98 International monetary system. Types of international monetary system.

international monetary system

a system for promoting INTERNATIONAL TRADE and SPECIALIZATION while at the same time ensuring long-run individual BALANCE OF PAYMENTS EQUILIBRIUM. To be effective, an international monetary system must be able to:
  1. provide a system of EXCHANGE RATES between national currencies;
  2. provide an ADJUSTMENT MECHANISM capable of removing payments imbalance;
  3. provide a quantum of INTERNATIONAL RESERVES to finance payments deficits. In addition, because of the structural weaknesses of some countries, particularly DEVELOPING COUNTRIES, financial aid facilitates are required to help resolve problems of indebtedness (see INTERNATIONAL DEBT).

The three functions identified above are highly interrelated, and a crucial role is played by the degree of fixity or flexibility built into the exchange rate mechanism, as Fig. 98 indicates. Thus, if exchange rates are rigidly fixed (see FIXED EXCHANGE RATE SYSTEM), balance of disequilibriums can only be removed by internal price and income adjustments (see BALANCE OF PAYMENTS EQUILIBRIUM), and countries will need to hold large stocks of international reserves to cover deficits while the necessary adjustments are given time to work. By contrast, where exchange rates are free to fluctuate in line with market forces (FLOATING EXCHANGE RATE SYSTEM), continuous external price adjustments will work to remove incipient imbalances before they reach serious proportions, thus reducing countries’ reserve requirements. Various international monetary systems have been tried, including the GOLD STANDARD and, currently, the INTERNATIONAL MONETARY FUND system. See EUROPEAN MONETARY SYSTEM.

References in periodicals archive ?
Part I discusses the economic theories of the international monetary system and starts with the paper entitled "The International Monetary System and the Global Financial Integration" by Asim Kumar Karmakar and Sebak Kumar Jana in which they postulate the interesting thesis that currency crises, banking crises, systemic financial crisis and foreign debt crisis are ultimately the result of the instability of the international monetary system in the context of globalization and distorting action of supranational organizations like the IMF which are subject to moral hazard problems.
The United States did agree to examine the case for a more thorough reform of the international monetary system, which led to the establishment in 1972 of the Committee on Reform of the International Monetary System and Related Issues (the Committee of Twenty, or C-20).
Cooper suggests several ways for improving the international monetary system.
He describes why the international monetary system is responsible for the global financial crisis and how China needs to develop new models to meet its development needs.

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