Exercise 4. Reading 2. Reforming the International Monetary System.
Read the text about the reformation of the IMS and answer True and False questions which follow. Support you answers with the information from the text.
| Reforming the International Monetary System The international monetary system is the set of rules, conventions and institutions that govern the conduct of monetary policies, their coordination (or non-coordination), exchange rates, and the provision of international liquidity. It is intimately linked to the international financial system, whose operation depends notably on the modalities under which liquidity is provided. By many measures, the US dollar continues to dominate the international monetary system – more than 40 years after the Bretton Woods Agreement, which initiated flexible exchange rates and ended the peg between gold and the dollar. Despite this dominance, there is a trend towards a ‘multipolar’ world with more than one widely used reserve currency. The international financial and monetary system must adapt to the global economy’s upcoming challenges by laying down the foundations for renewed world macroeconomic and financial stability. The non-system that characterises the world economy since the collapse of the Bretton Woods Agreement is the object of much criticism in terms of exchange rate volatility; abrupt reversal of private capital flows; persistent and ‘upstream’ external imbalances (net capital flows moving from emerging to rich countries); asymmetry in the adjustment mechanisms between borrowing and lending countries; asymmetry in the adjustment mechanisms between the United States, whose currency lies at the centre of the current arrangement, and the rest of the world; and excessive accumulation of foreign reserves by emerging countries. Moreover, some consider this ‘system’ to be an aggravating factor – or even a trigger – of the financial imbalances at the root of the recent financial crisis. Here are several concrete proposals that aim not only to increase the coverage of global liquidity necessary when facing individual and systemic crises but also to reduce demand for foreign reserves. Promote the development of alternatives to US Treasuries as a dominant reserve asset to accelerate the inevitable transition to a multipolar system. From this perspective, the issue of mutually guaranteed European bonds seems particularly desirable. In a probably more distant future, necessary steps may include opening of the Chinese capital account, convertibility of the yuan, and development of a yuan bond market. Make permanent the temporary swap agreements that were put in place between central banks during the crisis. Establish a star-shaped structure of swap lines centred on the IMF. Strengthen and expand such IMF facilities as Flexible Credit Lines (FCLs), Precautionary Credit Lines (PCLs), and the Global Stabilization Mechanism (GSM); also, expand the IMF’s existing financing mechanisms – notably, the New Arrangements to Borrow (NAB) – and allow the IMF to borrow directly on the markets. Establish a foreign exchange reserve pooling mechanism with the IMF that will provide participating countries with better coverage than self-insurance and, incidentally, will allow reserves to be recycled in the financing of productive investments. These measures, which reinforce the mechanisms that provide the liquidity required for proper functioning of the global economy, will have to be paired with prudential monitoring by the IMF of the evolution of financial balance sheets (by currency and maturity) so that the terms and conditions of access to liquidity can be adjusted in times of crisis. |
Questions.
1. The international monetary system is the same as the international financial system.
A) True B) False C) Not said
2. After the Bretton Woods Agreement, the US dollar is not the dominant currency anymore.
A) True B) False C) Not said
3. The US dollar is pegged to the gold standard.
A) True B) False C) Not said
4. The international financial and monetary system cannot function without adjusting to the challenges of the global economy.
A) True B) False C) Not said
5. World macroeconomic and financial stability is essential for the functioning of the international financial and monetary system.
A) True B) False C) Not said
6. The collapse of the Bretton Woods Agreement facilitated the functioning of the IMS.
A) True B) False C) Not said
7. Modern IMS lead to the recent financial crisis.
A) True B) False C) Not said
8. The suggested measures can prevent possible financial crises. N
A) True B) False C) Not said
9. Transition to a multipolar system means that US Treasuries no longer a dominant reserve asset.
A) True B) False C) Not said
10. IMF should be in the centre of all temporary swap agreements between central banks during the crisis.
A) True B) False C) Not said
11. All IMF facilities should be strengthened. N
A) True B) False C) Not said
12. IMF should be included in a foreign exchange reserve pooling mechanism with participating countries.
A) True B) False C) Not said