214 Module 8 The International Monetary System and Financial Forces TABLE 8 .1 Three-Tiered Categorization of IMF Exchange Rate Arrangements with Percentage of Users Exchange Rate Arrangement 2008 2009 2013 Hard Pegs 12.2 12.2 13.2 No separate legal tender 5.3 5.3 6.8 Currency board 6.9 6.9 6.3 Soft Pegs Conventional peg Stabilized arrangement Crawling peg Crawl-like arrangement Pegged exchange rate within horizontal bands 39.9 22.3 12.8 2.7 1.1 1.1 34.6 22.3 6.9 2.7 0.5 2.1 43.2 22.6 12.1 1.6 6.3 0.5 Floating Floating Free floating 39.9 20.2 19.7 42.0 24.5 17.6 34.7 18.9 15.8 Residual Other 8.0 11.2 8.9 Source: IMF. The floating exchange rate system, both managed and free floating, seems to be meeting its recent challenges, several of which—including a central bank liquidity crisis in the spring of 2008 and an ensuing global financial crisis—have been severe. In addition to the use of economic policy, coordination by the G7 countries (sometimes with Russia making a G8) has emerged as a key factor in the foreign exchange markets. In a recent coordinated intervention to stop the rise of the Japanese yen after the 2011 earthquake, central banks in Japan, Europe, and North America stabilized the strengthening yen, thereby stabilizing financial markets and avoiding a global crisis. This unusual intervention is discussed in the IB in Practice box. As G7 central banks have become more adept at influencing currency movements, the explosive growth in the volume of currencies being traded in the world’s foreign exchange markets challenges their efforts. A recent central bank survey shows that in April 2013, trading in FX markets averaged $5.3 trillion a day. Small banks accounted for 24 percent of the turnover, institutional investors 11 percent, and hedge funds another 11 percent. Corporations appear to have reduced their share of FX trading to only 9 percent, which may indicate that they are increasingly centralizing their finance function and settling their FX balances in house. The U.S. dollar was the main vehicle currency, appearing on one side of 87 percent of all the trades recorded during this audit month.12 From an annual volume of roughly $18 billion in 1979, foreign exchange transactions are in the range of $1,378 trillion today.13 So the market has increasing leverage to influence exchange rates. For example, if the foreign exchange market players believe the Japanese yen should increase in value against the US$ (strengthen against the $), sellers of the yen will increase its $ price on the market, and the yen will strengthen in spite of any government market intervention. The floating exchange system seems to be able to respond to market movements with flexibility and relative order. Table 8.2 summarizes the history of the monetary system, from gold, through fixed, to floating. Floating currencies can move against one another quickly and in large swings. Such changes have many causes, including political events, expectations, disasters, and government economic policies that encourage trade imbalances and deficits. These currency
Geringer_InternationalBusiness
To see the actual publication please follow the link above