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International Monetary Fund

at a premium and recommended that all members take effective action to prevent these transactions with “other countries or with the nationals of other countries.” The statement went on to say that: It is realized that some of these transactions are being conducted by or through non-member countries or their nationals. The Fund recommends that members make any representations which, in their judgment, are warranted by the circumstances to the governments of non-member countries to join with them in eliminating this source of exchange instability. Some

W. John and R. Woodley

. The bias against multiple rates is based upon the lessons of history, drawn from exchange experience in the 1930’s. During the depression years, multiple rates were used, particularly in Germany and in Latin America, as an export promotion device, and this led to retaliation by other countries and to a general environment of exchange instability and uncoordinated exchange rate policies. (For a description of these conditions, see Frank A. Southard, Jr., “International Financial Policy, 1920-44,” Finance and Development , Vol. II, No. 3, pp 135-43.) The Fund issued

Margaret G. de Vries

feared because of the competitive ways in which they had been used during the 1930’s. More important, because multiple rates are not merely restrictive practices but are in themselves rates of exchange, they can be a major source of exchange instability. And exchange rate stabilization and the attainment of fixed rates of exchange is, as has been stressed in the deliberations about multiple rates, a primary purpose of the Fund. In order to move toward this objective, the Fund had already, in late 1946, decided to set initial par values (see “Twenty Years with Par

Mr. Ulrich Baumgartner

nonresidents; and the sale by banks to nonresidents of their portfolio holdings of deutsche mark bonds of foreign issuers. These measures were complemented by the restriction of approvals for the payment of interest on bank deposits of nonresidents. Switzerland Switzerland felt compelled to resort to relatively severe and comprehensive controls in mid-1971—well after the Federal Republic of Germany had taken significant measures. The controls were designed to counteract increased exchange instability and to reduce the magnitude of speculative short-term capital

Margaret de Vries

in the context of floating exchange rates, these developments posed the threat of severe exchange instability and competitive depreciation reminiscent of the 1930s. Under H. Johannes Witteveen, its fifth Managing Director, the Fund responded quickly. Very soon after the 1972–73 rise in oil prices, it introduced two oil facilities which, in a new departure for the Fund, were financed by borrowings from members. As payments deficits persisted, the Fund continued to seek new arrangements for financing these deficits. The 1970s thus saw the introduction of the

Mr. David T. Coe and Mr. Se-Jik Kim

for a country of almost 50 million people to sustain such high growth for more than three decades. In stark contrast to this remarkable achievement, the honor student of economic growth was down on its luck in the late 1990s when it suddenly faced a financial crisis and its economy crashed. In 1997, consecutive bankruptcies of several large chaebol (Korean industrial conglomerates), coupled with financial crises or foreign exchange instability in Thailand and other East Asian countries, weakened investor confidence in Korea. As a result, foreign banks refused to

Fernando L. Delgado, Mr. Mynor Meza, and Marco Piñón

increased foreign exchange instability, destabilizing capital inflows, credit booms, and asset price bubbles. Preferably, macroprudential instruments should be market-friendly and have reinforcing microprudential effects. Depending on the speed of credit recovery, CAPDR countries could consider strengthening traditional leverage ratios, sectoral credit and provisioning limits, and maturity mismatches. Countries currently facing large capital inflows (e.g., Costa Rica) should consider further strengthening certain macroprudential measures to mitigate risks from a sudden

Mr. Joseph Gold

is realized that some of these transactions are being conducted by or through non-member countries or their nationals. The Fund recommends that members make any representations which, in their judgment, are warranted by the circumstances to the governments of non-member countries to join with them in eliminating this source of exchange instability. “The Fund has not overlooked the problems arising in connection with domestic transactions in gold at prices above parity. The conclusion was reached that the Fund would not object at this time to such transactions

Huw Pill, Mahmood Pradhan, and David T. Coe

countries, real exchange instability is used as a proxy for disequilibrium. Averages for the three and five years preceding interest rate deregulation are shown. Although fiscal and current account deficits persisted in the Asian countries, with the exception of the government deficit in Sri Lanka and to a lesser extent the current account deficit in the Philippines, they are not extreme ( Table 7 ). Price inflation is moderate and, although data limitations make evaluation problematic in some cases the real exchange rate is relatively stable. The situation is markedly

Mr. Joseph Gold

eliminating this source of exchange instability. “The Fund has not overlooked the problems arising in connection with domestic transactions in gold at prices above parity. The conclusion was reached that the Fund would not object at this time to such transactions unless they have the effect of establishing new rates of exchange or undermining existing rates of other members, or unless they result in a significant weakening of the international financial position of a member which might affect its utilization of the Fund’s resources. “The Fund has requested its members