Table of contentsIntroductionManaged floatingNon-sterilized interventionSterilized interventionEvolution of the international financial systemIntroductionThe period of the gold standard (1880 - 1914)Bretton Woods system (1945 - 1971)International Monetary Fund (IMF) )Reserve currencyAsian reserve managementBalance of PaymentsIntroductionBalance of paymentsCurrent accountCapital accountOfficial reserve accountTrade imbalancesImpact of reserve accumulationIntroductionGrowth of foreign exchange reservesGrowthBalance of paymentsExchange rateMonetary supplyCapital controlConclusionIntroductionBy studying the financial crises that have taken place since 1997 in Asia, in Russia and in South America, we see that in many cases, the short-term debt crisis has been aggravated by the destocking of stocks, bonds and currencies. Countries with a fixed exchange rate system were the first to be hit hard. Say no to plagiarism. Get a tailor-made essay on “Why violent video games should not be banned”?Get the original essayIn fact, the collapse of the Thai baht in July 1997 was followed by an unprecedented financial crisis in East Asia East. The Thai government has fixed the exchange rate of the Thai baht against the US dollar at a level of 24.70 baht to the dollar and this rate has been fixed and not allowed to float for the past 14 years ( Economic letter from the FRBSF of August 7, 1998). As is known, Everyone, Southeast Asian countries exercise a fixed exchange rate system linked to the US dollar. To prevent a similar financial crisis from occurring in Southeast Asia, Asian central banks have been accumulating their reserves in US dollars. See below: According to the Asian Reserve article (The Economist 02/08/2003), it is clearly stated that "governments view their large reserves as insurance against the sudden oscillations of a globalized economy and against any future crisis of such great magnitude.” from 1997-98. “Managed Float The current international monetary system is described as a managed float. (Arnold 1998, p. 766) defines managed float as “a flexible, managed exchange rate system, under which nations intervene from time to time to adjust their official reserves to moderate major fluctuations in exchange rates ". In other words, central banks intervene in foreign exchange transactions in order to influence their countries' exchange rates by buying and selling currencies. (Misbkin 1997, p. 502) described that "the intervention of central banks in the foreign exchange market affects exchange rates, that is to see the impact on the monetary base of a sale by the central bank on the exchange market of some of its holdings of assets denominated in a foreign currency called international reserves. For example: A central bank's purchase of domestic currency and the corresponding sale of foreign assets in the foreign exchange market result in an equal decline in its international reserves and the monetary base. Whereas the sale of domestic currency by a central bank to purchase foreign assets in the foreign exchange market results in an equal increase in its international reserves and the monetary base. Unsterilized intervention The central bank allows the purchase or sale of national currency to have an effect on the monetary base. as indicated above, we speak of unsterilized exchange interventions. An unsterilized intervention in which the domestic currency is sold to purchase foreign assets results in a gain in international reserves, an increase in the money supply, and a depreciation of the domestic currency. On the contrary, aUnsterilized intervention whereby the domestic currency is purchased by selling foreign assets leads to a decline in international reserves, a reduction in the money supply and an appreciation of the domestic currency (Misbkin, 1997). A foreign exchange intervention accompanied by a compensatory open market operation that leaves the monetary base unchanged is called sterilized foreign exchange intervention. A sterilized intervention leaves the money supply unchanged and therefore has no way of directly affecting interest rates or the expected future exchange rate. Because the expected return schedules remain at RETD1 and RETF1 in the figure below, and the exchange rate remains unchanged at E1 (Misbkin 1997, p. 505 - 507).Evolution of the international financial systemIntroductionBefore examining the impact of international financial transactions on monetary policy, we need to understand the past and current structure of the international financial system. The Gold Standard Period (1880 - 1914) (Salvatore 1998, p.678) describes "the gold standard in effect from approximately 1880 until the outbreak of World War I in 1914." ". The global economy operated on the gold standard, meaning that most countries' currencies were directly convertible into gold. Tying currencies to gold resulted in an international financial system with exchange rates fixed between currencies Fixed exchange rates under the gold standard had the important advantage of encouraging global trade by eliminating the uncertainty that occurs when exchange rates fluctuate (Bretton Woods system. 1945 - 1971) World War I caused massive trade disruptions Countries could no longer convert their currencies into gold and the gold standard collapsed (Misbkin 1997, p. 512) stated: “While. As Allied victory in World War II became certain, in 1944 the Allies met at Bretton Woods, New Hampshire, to develop a new international monetary system aimed at promoting global trade and prosperity after the war. Under the agreement between the Allies, central banks bought and sold their own currencies to keep their exchange rates fixed at a certain level called a fixed exchange rate regime. The agreement lasted from 1945 to 1971 and was known as Bretton Woods. "The Bretton Woods system collapsed in 1971. We now have an international financial system that has elements of a managed float and a fixed exchange rate system. The International Monetary Fund (IMF) (Salvatore 1998 , p. 682) also described "the system designed at Bretton Woods called for the creation of the International Monetary Fund (IMF) with the aim of (1) ensuring that nations followed an agreed set of rules of conduct in matters international trade and finance and (2) to provide borrowing facilities to nations in temporary situations. balance of payments difficulties. "Reserve currency Because the United States emerged from World War II as the world's greatest economic power, with more than half of the world's manufacturing capacity and most of the world's gold, the system of Bretton Woods fixed exchange rates were based on the convertibility of the US dollar into gold. Fixed exchange rates were to be maintained through foreign exchange market intervention by central banks of countries other than the United States, which purchased and. sold assets in dollars, which they held as international reserves The US dollar, which was used by other countries to denote the assets they held as international reserves, was called a reserve currency (Misbkin 1997). Today, the US dollar still plays the dominant role as a reserve currency due toof the largest consumer market. in the United States. There is currently no other alternative to the US dollar. However, this could happen in the future. Management of Asian reserves According to the article in A Golden Moment for Asian Reserve Management (DSG Asia 02/10/2003), Asian central banks have not diversified their foreign exchange reserves much. As shown in Table 1 of Annex I, the share of the dollar in the monetary composition of world foreign exchange reserves has barely changed since 1999. According to the article in Asian Reserve (The Economist 02/08/2003), it is also described “the risk for the high reserves policy is a sharp fall in the dollar. Most Asian central bankers still won't hear of it. » As noted earlier, the most important feature of the Bretton Woods system was that it established a fixed exchange rate regime. Central banks could intervene in the foreign exchange market by buying and selling their own currencies to keep their exchange rates fixed at a certain level. For example: when the national currency is overvalued, the central bank must buy domestic currency to keep the exchange rate fixed, but it loses international reserves as a result. On the contrary, when the domestic currency is undervalued, the central bank must sell domestic currency to keep the exchange rate fixed, but in doing so it gains international reserves. Refer to the graph in chapter 1.4. Under the Bretton Woods system, Asia's high foreign exchange reserves can keep their currencies supported by the fixed exchange rate regime, with the strong reserve serving as insurance for the government against any future financial crisis. In a closed economy, bad loans caused by risky loans may not lead to a run, because depositors know that the government can provide enough liquidity to financial institutions to prevent losses to depositors. In an open economy, this same injection of liquidity can destabilize the exchange rate. As a result, during periods of uncertainty, runs or speculative attacks on a currency can only be avoided if holders of domestic assets are assured that the government can meet the demand for foreign currencies (FRBSF Economic Letter of August 7, 1998). International reserves help it maintain the foreign confidence needed to attract FDI and obtain foreign loans on good terms. However, as mentioned earlier, Asian central banks have not diversified their foreign exchange reserves much, with the US dollar still sharing a significant share. The big risk for the high reserve policy is a sharp fall in the dollar.Balance of paymentsIntroductionAccording to the article in Asian Reserve (The Economist 02/08/2003), a growing number of opinions are beginning to question foreign exchange reserves high in Asia. Increasingly, they are seen less as a symbol of virility than as a kind of secret tax – a cost of the unbalanced regional model of export-led growth and a vulnerable financial sector. These are the reasons underlying the accumulation of reserves. Balance of Payments Countries track their level of domestic production by calculating their gross domestic product (GDP); similarly, they track the flow of their international trade (revenue and expenditure) by calculating their balance of payments. (Misbkin 1997, p. 507 - 508) defined balance of payments as “an accounting system for recording all payments that have been made”. a direct impact on the movement of funds between a nation (private sector and government) and foreign countries. The balance ofpayments provides information on a country's imports and exports, income of domestic residents on assets located abroad, foreign income on domestic assets, gifts to and from foreign countries (including foreign aid) and official government and central bank transactions (Arnold 1998). Balance of payments accounts record both debits and credits. A debit is indicated by a minus (-) sign and a credit is indicated by a plus (+) sign. Any transaction that feeds the country's currency into the foreign exchange market is recorded as debit. Any transaction that creates demand for the country's currency in the foreign exchange market is recorded as a credit (Arnold 1998). See Appendix I, Exhibit 1, for a summary of debits and credits. International transactions summarized in the balance of payments can be grouped into three accounts: the current account, the capital account and the official reserve account. See Appendix I, Exhibit 2, for the United States Balance of Payments, 1999. The current account (Arnold 1998, p. 744) describes the current account "includes all payments related to the purchase and sale of goods and services. The components of the account include exports, imports. , and net unilateral transfers abroad. The current account balance is the summary statistic of these three elements. Exports of goods and services are called exports of goods and services by Americans, and they receive investment income on the assets they own abroad, which leads to an increase in the demand for dollars Americans at the same time as they increase the supply of foreign currencies, they are therefore recorded as credits (+). services are seen as Americans import goods and services, and foreigners receive income on assets they own in the United States, leading to an increase in demand for foreign currencies at the same time as they increase the supply of US dollars on the foreign exchange market, they are therefore recorded as debits (-). Merchandise trade balance = merchandise exports - merchandise imports Merchandise trade deficit: merchandise exports < merchandise imports Merchandise trade surplus: exports of goods > imports of goodsCapital account (Arnold 1998, p. 746) describes the capital account "includes all payments relating to the purchase and sale of assets and borrowing and lending activities include outflows of American capital and foreign capital inflows. The capital account balance is a summary statistic and is equal to the difference between these two items. Outflows of U.S. capital are called U.S. purchases of foreign assets and U.S. loans to foreigners are outflows of U.S. capital. As such, they give rise to a demand for foreign currencies and a supply of US dollars on the foreign exchange market. Therefore, they are considered a flow. Foreign capital inflows are called foreign purchases of U.S. assets and foreign loans to Americans are foreign capital inflows. As such, they give rise to a demand for US dollars and a supply of currencies on the foreign exchange market. Therefore, they are considered a credit. The Official Reserve Account (Arnold 1998, p. 746) describes “a government has official reserve balances in the form of foreign currencies, gold, its reserve position in the International Monetary Fund, and special drawing rights. Countries that have a deficit in their combined current account and capital account can draw down their reserves. Because thebalance of payments account must be balanced, the official balance of reserve transactions tells us the net amount of international reserve that must circulate between central banks to finance international transactions. Movements in international reserves have a significant impact on the money supply and exchange rates (Misbkin 1997). Trade Imbalances Asia's high foreign exchange reserves reflect the development policy of Asian countries. The increase in foreign exchange reserves is an auspicious development that reflects sustained economic growth and strength. Most economies in the region are export-driven. Let's assume that in China, in 2001, Chinese exports increased by 23% to $266 billion and accounted for 4.4% of all global exports. China's trade surplus in 2001 increased to over $30 billion (The Economist 2/15/2003, vol. 366). Good trade performance is one factor behind China's strong external payments position in 2002. The other factor is closely related to the actions of foreign investors in China. In 2002, China became the top destination for FDI, absorbing US$52.7 billion in inflows, an increase of 12.5% ​​from the previous year. Combined with strong trade results, they increased foreign exchange reserves from $212.2 billion in 2001 to $286.4 billion in 2002 (China.org.cn 04/25/2003). The creation of China's foreign exchange reserves is the corollary of the increase in exports. and FDI, as well as certain forms of capital controls exercised to safeguard the development of its financial system. The rapid accumulation of foreign exchange reserves is the downside of China's large balance of payments surplus. Additionally, China will retain the value of its currency. Weak currencies can help keep a country's products cheap in international markets, thereby boosting exports. U.S. lawmakers have threatened to impose tariffs on Chinese imports, accusing currency controls of unfairly contributing to China's $103 billion trade surplus with the United States (Metro Post 9/16/2003 ). Additionally, a domestic demand policy will affect the country's reserve level. A balance of payments deficit is associated with a loss of international reserves; similarly, a balance of payments surplus is associated with a gain.Impact of Reserve AccumulationIntroductionChina's rapid increase in foreign exchange reserves has recently attracted much attention. In this essay, the impact of an accumulation of reserves will be discussed on the aspect of money supply, balance of payments, exchange rates and growth in China. Rising foreign exchange reserves China's foreign exchange reserves have grown at an astonishing rate over the past two years. Its foreign exchange reserves almost doubled, from $168.6 billion in January 2001 to $316 billion in March 2003 (Annex II, Figure 1). China is now second behind Japan in terms of reserves. Covering 12 months of imports and almost double the country's external debt of $169 billion, China's foreign exchange reserves have now reached a rather comfortable level (Hang Seng, June 2003) . sustained economic growth and strength. China's national savings rate now reaches 40% of GDP (Hang Seng, June 2003). Balance of Payments The rapid accumulation of foreign exchange reserves is the flip side of the large balance of payments (BOP) surplus. Capital account surplus.