International Finance

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The Trilemma under Any Fixed Exchange Rate Regime

The trilemma is a three-faceted dilemma faced by small and open economies under any fixed exchange rate regime. (A small economy is an economy that cannot influence the world interest rate. An open economy [more…]

The Bimetallic Era (until 1870) of Currency

Although the gold standard dates back to 1821 in the United Kingdom as a legal institution, until the early 1870s, many countries had a bimetallic standard by pegging their currency to both silver and [more…]

Gold Standard of the Pre–World War I Era (1870–1914)

The period 1870–1914 is considered the heyday of the international gold standard. The reason for the successful maintenance of fixed exchange rates for about four decades is that internal balance generally [more…]

The Currency Standard of the Interwar Years (1918–1939)

As in the case of other wars, governments suspended the gold standard during World War I, to increase the money supply and pay for the war. Therefore, as in the case of all post-war eras, many countries [more…]

The Impact of the Bretton Woods Conference in 1944

In July 1944, more than 700 delegates from 44 nations attended the United Nations Monetary and Financial Conference in Bretton Woods (New Hampshire), which later became known as the Bretton Woods Conference [more…]

Reserve Currency System Established at the Bretton Woods Conference

The reserve currency system that was established at the Bretton Woods conference is a version of the gold standard. In this system, one of the world currencies is identified as the reserve currency, and [more…]

International Monetary Fund: Manager of Fixed Exchange Rates

The International Monetary Fund (IMF)’s Articles of Agreement implied both discipline and flexibility, to avoid the mistakes of the interwar period. The discipline part of the agreement implied that the [more…]

Dollar Shortage and the Marshall Plan (1947)

In the immediate aftermath of the Bretton Woods Conference, the problem of a dollar shortage emerged. During the late 1940s, the U.S. was running large current account surpluses, and its gold reserves [more…]

The Decline of the Bretton Woods System (1950s and 1960s)

As early as 1950, the U.S. current account balance showed a deficit. Until John F. Kennedy won the presidential election in 1960, the U.S. response to the increasing current account deficit was to introduce [more…]

The End of the Bretton Woods System (1971–1973)

While the U.S. remained insistent on continuing its mission described by the Bretton Woods system, the world was changing. Throughout the 1960s and 1970s, important structural changes were taking place [more…]

Advantages and Disadvantages of Floating Exchange Rates

Fiat currency doesn’t imply a fixed exchange rate. In fact, fiat currencies are compatible with a floating exchange rate regime, in which the value of a currency is determined in foreign exchange markets [more…]

Hard Currency Pegs

Dollarization and currency boards are among the examples of hard pegs, which severely limit the possibility of an autonomous (independent) monetary policy in a country. Therefore, sometimes the exchange [more…]

Unilaterally Pegged Exchange Rates

Unilateral currency pegs appeared following the end of the Bretton Woods era. The difference between the pegged exchange rate regimes of pre- and post-1973 periods stems from the different types of money [more…]

Attract Foreign Investors with Soft Pegs

Some soft pegs are implemented for other reasons than international trade. The aim here isn’t to make exports or imports less expensive. Some soft pegs are introduced to attract foreign investors to the [more…]

The IMF’s Role in the Post–Bretton Woods Era

The International Monetary Fund (IMF) was originally a Bretton Woods organization. At the Bretton Woods Conference of 1944, it was clear that the post–World War II international monetary system was going [more…]

Does IMF Support Provide Stability or Create Moral Hazard?

Because the International Monetary Fund (IMF) support to countries without pegged exchange rates is still new, not much evidence indicates what this kind of support achieves. However, the IMF’s support [more…]

The Advantages and Disadvantages of Fixed Exchange Rates

Professional and laymen alike have an opinion about what kind of an international monetary system the world should have. A metallic standard system such as the gold standard or the reserve currency standard [more…]

The Advantages and Disadvantages of Flexible Exchange Rates

During wars and other military conflicts, the gold standard was abandoned. During these times, fiat currency and, consequently, flexible exchange rates ruled. Therefore, the post–Bretton Woods era starting [more…]

Alternative Exchange Rate Regimes

In addition to the fixed and flexible exchange rate regimes, intermediate foreign exchange regimes also have appeared in the post–Bretton Woods era. Pegged exchange rates, especially the soft or crawling [more…]

Introduction of the Euro

The euro was introduced as an accounting unit in 1999 and as currency in circulation in 2002. But the emergence of the common currency was based on almost half a century of discussions and preparations [more…]

European Monetary System (EMS) and the European Monetary Union (EMU)

In the case of euro, the European Monetary System (EMS) and the Economic and Monetary Union (EMU) reflect preparation periods during which countries in the common currency area are ready to use the common [more…]

European System of Central Banks (ESCB) and European Central Bank (ECB)

In 1998, the European Central Bank (ECB) was established under the European System of Central Banks (ESCB). The ESCB includes the ECB and the national central banks [more…]

Accomplishments and Challenges of the Euro-Zone

Since its introduction in 1999, the euro has accomplished many positive milestones: The most obvious benefit of adopting a single currency is to remove the transaction cost of exchanging currency. Consumers [more…]

How the Euro Stands Up to Other Currencies

Since its introduction in 1999, the euro has become one of the major reserve currencies, along with the dollar, the Japanese yen, the pound sterling, and the Swiss franc. [more…]

What the Future Holds for the Euro

Considering the sovereign debt crisis of the early 2010s, the European Union (EU) and the Euro-zone are facing formidable challenges. This crisis has sparked questions regarding the long-term viability [more…]


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