The international monetary system
Introduction
This chapter provides a review of the fundamentals of the international monetary system - a vast topic on which there is a large bibliography. Since this topic encompasses materials from three chapters of your textbook, it follows that we will treat this material in outline rather than in great depth. Chapter 9 of your textbook is about 'The foreign exchange market', Chapter 10 is about 'The international monetary system' and Chapter 11 deals with 'The global capital market'.
One design for this topic could include integration of material from two or all three textbook chapters. For example, we could begin with the purchasing power of the Euro in relation to the US dollar (Chapter 9), link this to the fixed exchange rate system (Chapter 10) and tie it all together (Chapter 11) with the position of Europe in the international capital market. Such an approach would have its own coherence, but from a student perspective it could result in a confusing sequence of textbook readings. With this in mind, the chapter is in three parts which correspond to the textbook chapters. Thus Part A deals with the foreign exchange market (Chapter 9), Part B deals with the history and structure of the international monetary system (Chapter 10) and Part C considers the international capital market (Chapter 11).
Each part will concentrate on the fundamentals of its topic with minimum elaboration. You must 'flesh out' each part through the readings. You should also remember we are dealing with a large, complex area and you will need to make connections across Parts A, B and C if this chapter does not specifically do it for you.
Topics
The following is the outline of the topics covered in this chapter.
- 6.1 Part A: The foreign exchange market
- 6.2 The nature and functions of the foreign exchange market
- 6.3 Part B: The international monetary system
- 6.4 Part C: The global capital market
- 6.5 Structure and functions of the global capital market
- 6.5.1 Euromarkets
- 6.5.2 The global bond market
- 6.5.3 The global equity market
- 6.5.4 Risk and the cost of capital
- 6.5.5 Summary: Part C
- 6.6 Integrative summary: Parts A, B and C
Learning outcomes
The objectives for this chapter have been carefully constructed to reflect the most significant concepts and ideas we are going to cover and to provide a focus for your work during the chapter. After completing the work you should be able to:
- explain how the foreign exchange market works
- dentify the forces that determine exchange rates
- describe the gold standard
- outline the history of the Bretton Woods Agreement
- differentiate between the roles of the International Monetary Fund and the World Bank
- discuss the functions of:
- the global capital market
- the international bond market
- the international equity market
- calculate the cost of capital
- explain the implications for business of all the above aspects of the international monetary system.
