How would you characterize the international monetary system since collapse of Bretton Woods?

What are the advantages and disadvantages of its system? Multiple exchange rate regimes , Such as single currencies, fixed and flexible exchange rate dollarization and free floats in US and Uk. Dollarization refers to the decision of a less developed country to tie its currency closely to the dollar or to accept the dollar as its currency.
Arguments in Favour of a Fixed Rate

Reduced risk in international trade - By maintaining a fixed rate, buyers and sellers of goods internationally can agree a price and not be subject to the risk of later changes in the exchange rate before contracts are settled. The greater certainty should help encourage investment. Introduces discipline in economic management - As the burden or pain of adjustment to equilibrium is thrown onto the domestic economy then governments have a built-in incentive not to follow inflationary policies. If they do, then unemployment and balance of payments problems are certain to result as the economy becomes uncompetitive.

Fixed rates should eliminate destabilising speculation - Speculation flows can be very destabilising for an economy and the incentive to speculate is very small when the exchange rate is fixed. Disadvantages of the Fixed Exchange Rate

No automatic balance of payments adjustment - A floating exchange rate should deal with a disequilibrium in the balance of payments without government interference, and with no effect on the domestic economy. If there is a deficit then the currency falls making you competitive again. However, with a fixed rate, the problem would have to be solved by a reduction in the level of aggregate demand. As demand drops people consume less imports and also the price level falls making you more competitive.

Large holdings of foreign exchange reserves required - Fixed exchange rates require a government to hold large scale reserves of foreign currency to maintain the fixed rate - such reserves have an opportunity cost. Loss of freedom in your internal policy - The needs of the exchange rate can dominate policy and this may not be best for the economy at that point. Interest rates and other policies may be set for the value of the exchange rate rather than the more important macro objectives of inflation and unemployment.

1. The main currencies (US$ and Euro) all float one against another 2. There are regional currency blocks One main international reserve currency is US. As October 2010, 61% world total allocated foreign reserves were denominated in dollar, against 27% for Euro. -lack of a central, dedicated multinational monetary authority although there are G20, International Monetary fund

US and China trade imbalance

How would you characterize the flows of payments between the US and China?
the current account is one of the two primary components of the balance of payments, the other being capital account. It is the sum of the balance of trade (net earnings on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers.

The basic equation of a country's balance of payments is analogous to a company's balance sheet. The capital account and current account have to net out to zero, with central bank reserves functioning as the plug to account for any difference. If a country has a capital surplus (ie, foreigners are net investors of capital into the country), then it will run a current account deficit. The US is a pretty stable example of this: for a long time, the US has consumed more than it earned, leading to a current account deficit, which has been balanced out by a capital account surplus (ie, foreigners financing our spending--mainly by buying our debt.) Reserves can come into play as a form of making the whole thing balance. China runs both a capital account surplus AND a current account surplus--foreigners are both investing into China and buying more exports from China than China imports from them. As a result, Chinese currency reserves must grow every year by the amount of the combined surpluses to make things balance out. Relationship exchange rates and the trade balance? Why china is reluctant to do it?
Action to reduce a substantial current account deficit usually involves increasing exports (goods going out of a country and entering abroad countries) or decreasing imports (goods coming from a foreign country into a country). Firstly, this is generally accomplished directly through import restrictions, quotas, or duties (though these may indirectly limit exports as well), or by promoting exports (through subsidies,custom duty exemptions etc.) For US, Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly increase the balance of payments.

Secondly,adjusting government spending to favor domestic suppliers is also effective.

The balance of payments describes the relationship of import, exports, and their payment transactions between countries. How these payments are made and their value is closely related to the exchange rate system. In general, the real rate of exchange between two countries depends on their price levels and these price levels may vary through trade and production. However, nominal exchange rates depend on the level of trade to provide currency because the relative value of currencies depends on how much of one country's currency can be used to buy the currency or products of another. In general, since the balance of payments reflects this relationship of transaction, it directly influences nominal exchange rates and indirectly affects real exchange rates through trade.

The relationship between exchange rate and trade balance. Appreciation (revaluation) -Make exports become costlier and import cheaper - should lead to a worsening of the trade balance (Marshall-lerner condition) Depreciation (Devaluation) -Make exports become cheaper and imports costlier

-Should lead to an improvement of the trade balance

Cost and benefit of revaluation of currency Adv. a countrys currency to appreciate, a general description of the economy in good condition. Because in normal circumstances, only the healthy and stable economic growth, currency appreciation of the RMB exchange rate possible. This brought about by the economic value of the steadily in good condition, attractive to foreign investors is great. China still has a high trade surplus and huge foreign exchange reserves, Chinas economic growth remains the worlds most Aspect landscape, so the long-term trend of currency appreciation will not change. If the RMB appreciation will lead to many negative factors appreciation of the RMB equivalent of the economic effects of increased export prices overall. The consequences of course, is to curb exports, which is obviously not conducive to economic development. the rapid appreciation of the yuan would reduce foreign direct investment. If the RMB appreciation, it means more foreign investors to pay the appropriate amount of dollars, its consequence is to reduce foreign investment. will lead to increased unemployment. In China, exports account for 30% of GDP. If the currency appreciation, export enterprises sustained losses or even collapse, leading to unemployment, thus increasing risks of social instability.

1, 2 in favor of Chinese imports, the cost of raw material imports down 3-dependent firms, foreign investment capacity of domestic enterprises increased 4, foreign-invested enterprises in China, earnings increased by 5, is conducive to learning and training personnel abroad 6, external debt service pressure to reduce 7, 8, China's more economical to sell assets, the international status of Chinese GDP increased by 9, increase the state tax revenue of 10, the international purchasing power of Chinese people, the negative impact of a renminbi under the capital account is not freely convertible, meaning that the exchange rate decision mechanism is not the market, change does not make sense 2, the Chinese yuan appreciation would bring greater pressure of deflation 3, the appreciation of the RMB exchange rate will lead to a decline in attractiveness to foreign investment and reduce foreign direct investment in China; 4, to China exports cause great harm to 5, the RMB exchange rate appreciation will reduce the profitability of Chinese enterprises, increasing employment pressure

Why US is the world reserve? Bretton woods system (See books about banking holding dollar In 1945, the US authorities held 70% of the worlds gold reserves. It was reasoned that foreign central banks would be more willing to hold dollars in their reserves if they knew that they could be converted into gold. Can euro or yuan be world reserve?

Most American economists expect that the role of dollar will depend more on the strength of the amercian economy than on anything else, and that the importance of the dollar will determined by the American financial system. If the euro were to replace the dollar as the worlds key currency, there would be important implications for both private American financial interests and the American government.If the euro were to replace the dollar, the benefits of scale and lower transaction costs would be transfeered from amercian to European finaical institution Yuan can not be used as world reserve currency as the Chinese government still maintain capital control. Not attractive until it has a strong bond market. Andly only 0.9Q% currency market transaction is yuan. Bretton Woods System Bretton woods established a system of fixed but adjustable exchange rates.Each currency assigned a central parity against the dollar. The price was set to the price of gold at $35 per ounce. In case of Balance of payment fundamental disequilibrium, ability to devalue or revalue ones currency, within a 10% margin. Beyond this margin, they need to obtain the IMs authorization. 2. Convertibility or current account transactions Government could not prevent residents from buying or selling currencies for current account transaction. The government can still employ capital control. Credit facilities and IMF International monetary fund set up to ensure the good functioning of the fixed exchange rate regime. It provided credit to help countires financing temporary BoP imbalances. There are quotas for member and can be drawn upon when needed . Why Bretton Woods system collapse? The liquidity problem- Triffin dilemma. 1. 2. 3. 4. 5. With growing trade, demand for international reserve (dollar) would rise. U S would run deficits and purchasing dollar to provide dollars The US dollar liabilities would increase and exceed gold reserves. As a result , the fixed value of dollar gold would be impossible to maintain. Central will begin to convert reserves into dollars.

Lack of an adjustment problem 1. The fundamental disequilibrium is difficult to solve through X-rate adjectment. 2. The USA reluctant to devalue the dollar in term of gold fo fear of damaging the credibility 3. Other currencies reluctant to devalue or revalue as well due to the competitiveness.

4. The surplus countries included Germany , Japan and Switzerland- reluctant to revalue as experience strong export growth . -> unemployment. Identify two ways in which international investment can take place, give specific examples Portfolio investment short term n non controlling share. The actors involved therefore is non measureable.
Foreign direct investment (FDI) is direct investment by a company in production located in another country either by buying a company in the country or by expanding operations of an existing business in the country. Object of the direct investor should be the establishment of a lasting interest in another countrys firm. Lasting interest defined as shareholdings bearing more than 10% of votes in a firm. Greenfield is an acquisition of new assets (plans, buildings). It directly adds to production capacities in the host country. M&A is an acquisition of existing assets(stocks) For example Jan 2012. 8.% stake in thames wawer by CIC, Chinese fund. Costs and Benefits of FDI. Adv. Job creation (increased productive capacity) -local growth -contribution to value-added -tax receipts. Disadv. -crowding out of local producers -environmental impact -if there is a lot of FDI into one industry, the country will dependent on that industry. it may turn into a risk that is
why countries like the Czech Republic are "seeking to attract high value-added services such as research and development (e.g.) biotechnology

What the main pull and push factors? The direction and intensity of K flows can interpreted in terms of push and pull factors. Push factors include lower returns in the home country, lower economic growth, lower stock market growth, higher taxation and regulation Pull factors include higher returns in the host country, higher marginal productivity of capital , high econ growth, new market and improving investment environment.

1970-2000: 1. 2. 3. Mid to late 1980s: rapid growth, fuelled by freer capital movements and increasing role played by MNCs. Relative decline in early 1990s. Due to world recession and debt crisis in developing countries. Significant acceleration in the mid 1990s fuelled by new economy boom.

Hedge funds are collective investments that aim to make money whether the market is moving up, down or sideways. Unlike unit trusts, Oeics or investment trusts, which tend to only grow when shares rise, hedge funds can make money when share prices are falling. They do this using a range of complicated specialist techniques. The most commonly used is by going long or short on a share. Most private investors simply go long on a share, buying it in the hope that the price will rise.

Where an investor goes short, they believe that the equity will fall in value. There are two main ways that hedge funds can do this. The first is by 'shorting' the stock, where the investor 'borrows' a stock to sell it, with the hope that it will decrease in value so they can buy it back at a lower price and keep the difference. Another way of taking advantage of falling share prices is by dealing in 'contracts for difference'. This allows the investor to make money on share price movements without actually buying the shares

Should and can hedge funds be regulated on an international basis?

According to a report by the International Organization of Securities Commissions, the most common tactic is the direct regulation of financial advisersincluding hedge fund managers, which is primarily intended to protect investors against fraud. Specific regulations differ by national, federal and state jurisdiction. Historically, hedge funds have been exempted from certain registration and reporting requirements that apply to other investment companies, because in most jurisdictions regulation permits investments in hedge funds by only "qualified" investors who are able to make an informed decision about investment decisions without relying on regulatory oversight. In 2010, new regulations were passed in the US and European Union, which (among other changes) introduced new hedge fund reporting requirements. The Dodd-Frank Wall Street Reform Act was passed in the US in July 2010, and contains provisions which require hedge fund advisers with $150 million or more in assets to register with the SEC. In November 2010, the EU Parliament passed the Alternative Investment Fund Managers Directive, which seeks to provide greater monitoring and control of alternative investment fund managers operating in the EU.
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