The International Monetary System: Part 1

This chapter presents the international monetary system in the contemporary context. It is argued that while in theory a large number of economies seemingly operate under free-floating exchange rates, in reality the majority of economies adhere to a system of managed exchange rates to lesser or greater degrees. The way in which central banks intervene to manage their respective domestic exchange rates in the face of depreciation or appreciation pressures when creditor banks refuse to provide complete elasticity to debtor banks is then unpacked through systems of financial accounts. Moreover, the consequences of global imbalances on domestic policymaking are considered, and it is argued that while the “impossible trinity” (or the monetary trilemma) is perfectly valid as a policy framework when the domestic economy incurs a balance of payments deficit, the same cannot be said if the domestic economy posts a balance of payments surplus. Several policy coordination initiatives are also presented. The operational mechanics of the European monetary union are then discussed.