MANGED FLEXIBILITY

OF EXCHANGE

RATE

MADE BY RAMAL KAMAL

Introduction of Exchange Rate

Fixed exchange

rate

Flexible or floating

exchange rate

Managed flexible

exchange rate

Managed flexible exchange rate came into existence in the Early’s 1970 because

Bretton Wood System was too rigid and were unable to provide effective mechanism to tackle to international trade imbalances caused disequilibrium in exchange rate. As a result, domestic stabilization becomes

unstable.

Bretton Wood System• Institution of world bank set up after world war 2.

•Developed by United Nations.•Financial and Monetary Conferences held in Bretton Wood, New Hampshire

•From July 1 to July 22, 1944.

BRETTON WOOD SYSTEM• Currencies were fixed to price

of gold• US dollar was seen as a

reserve currency. • Main goal is to prevent

competitive devaluation and promote economic growth.

• Agreement was dissolved in between 1968 and 1973.

• Bretton Wood put a limit on borrowing money and United State want to spend more money.

• Bretton Wood had all of currencies pegged to dollar, and dollar pegged to gold lead to financial problems in overall world.

• (IMF) has 172 members. Among which 76 member countries have pegged (fixed) exchange rate

• 13 Economic European Communities have managed flexibility

• Other 83 states (including US UK, Canada, Japan, Italy) have full flexibility.

• 2/3 and 4/5 of world trade is conducted under managed flexibility

• full freedom of choice of exchange rate regime

• Present system can be regarded as more flexible than fixed E.R

Present System

Of Manage

d Flexibili

ties

It should be remembered, at that time present managed flexible exchange rate was not established. After the establishment of managed Flexibilities, the present international financial system faced important shortcoming.

1) Unexpected movements of exchange rate

2) The gross and persistent misalignment of exchange rate

3) Fail to promote greater coordination of macroeconomic policy

Reforms in Present System of Managed Flexibilities

number of reforms have been adopted to act as a stepping stone towards present international monetary system. Increasing purity among international monetary system

Strengthening banking and financial system

Private sector involvement

prevent infant markets by providing financial resources from financial crises

Increasing Purity Among International Monetary System

IMF established Special Data

Dissemination Standard (SDDS)

to warn the member countries about long term short term debt,

budget and current account

deficit, and international

reserves as a % of GDP..

The IMF is also proposing

“clearing house” to keep the record

of all loans and investments made by foreign banks and institutions.

Financial Stability Record (FSR)

Financial Sector Assessment (FSA’s) and

Financial System Stability

Assessment (FSA’s)

Strengthening Banking and

Financial SystemTo strength banking and financial system proper supervision is needed so that banks would meet capital requirement and publish the information regarding loan. The IMF

formulates good practices in accounting, auditing,

system settlement, insurance, and corporate

governance.

Private Sector Involvement

According to IMF there must

be greater involvement of private sector

in infant markets by

providing aids and money.

Provide Adequate Financial Resources

debt-restructuring system is g

etting a lot of attention at the IMF,

the World Bank, and the Bank for International Settlements

(BIS). it should not be easy for an emerging market economy

declare bankruptcy (so as to avoid the problem of moral

hazard), bailing in lenders is necessary to resolve a financial

crisis.

Contingency

Credit Line

(CCL)