Chapter 1 - An Overview of the Global Financial System

University:
California State University, Northridge
Course:
ACCT 220 | Introduction to Financial Accounting
Academic year:

2022
Views:

128

Pages:

26
Author:

SophGr

Unit – II Global Financial System Chapter 1 – An Overview of the Global Financial System Financial System ● ● Production flows from: – Land & natural resources – Labor and managerial skills – Capital Equipment Payments flow from: – Goods & Services sold Flows in Global Economy Types of Markets Factor Markets 1. Factor Markets: ● Exchange the services of: – – – – Labor Capital Land (Inc. natural resources) & Entrepreneurship 2. Product Market 3. Financial Market Financial Markets Functions of Global Financial System ● ● ● ● ● ● ● Savings Functions Wealth Functions Liquidity Function Credit Function Payment Function Risk Protection Policy Function Types of Financial Markets in Global Financial System ● Money Market ● ● Open Markets ● ● Negotiated markets ● Primary Markets ● Secondary Markets ● Spot Markets Futures & Forwards Markets Options Market Approaches to Global financial system Primary approaches Liberal view Social democratic front Neo Marxists International Monetary System ● ● Set of internationally agreed: – Rules for international trade – Conventions & – Institutions facilitating international trade Provides international buyers & sellers: – Means of payments etc. – Sufficient Liquidity History of Global Financial System 1. Pre World War-I Era (1870 - 1914) • Gold Standard 2. Between the World Wars (1919 - 1939) 3. Bretton Woods Era (1945 - 1971) 4. Post Bretton Woods Era (1971 - Present) 5. Floating & Fixed Exchange Rates Pre World War I Era ● Well integrated financial order ● Also called first age of globalization ● Money Unions allowed international transactions ● ● Transactions were also facilitated through Gold Standard Great Britain at the helm of world economy Gold Standard ● ● Standard economic unit is a fixed Weight of Gold – Classical Gold Standard – Gold Exchange Standard – Gold Bullion Standard – Gold Certificates Most countries switched to Gold Standard before WWI Between the World Wars ● ● ● ● A Period of De-Globalization Many countries abandoned except United States Gold Standard USA Becomes the financial center of the world World economic situation worsens due to war debts Bretton Woods Era 1945 - 71 ● Established monetary relations between world’s major industrial states – International Monetary Fund (IMF) & – International Bank for Reconstruction and Development (IBRD) ● Currency of countries tied to USD ● In turn USD was pegged against Gold Bretton Woods System Post Bretton Woods ● Some Nations start accumulating Gold ● Gold Prices soared due to international demand ● US cancels Gold convertibility ● System of Floating rates begins Floating Exchange Rate ● The rate of currency is allowed fluctuate ● Market forces determine the exchange rate ● Most countries now running Floating rate ● Central Banks may participate in market operations to stabilize currency Fixed Exchange Rate ● ● Central Bank determines the rate and maintains it. Central bank is responsible for maintaining the supply and demand of currency ● Central Bank buys & sells its own currency ● High level of foreign reserve are required Globalization ● ● Increased cultural and economic activity on global level Goods & services can be distributed to international consumers ● More capital availability and bigger markets ● Financial Globalization ● Financial Integration Types of Global Financial Integration ● Integration of Public Sector ● Integration of the Corporate Sector ● ● Foreign Direct Investments / Foreign Institutional Investors Worldwide interbank markets Risk of Financial Globalization ● ● ● ● Domestic & Foreign Market Discipline Domestic crisis in case of international financial anomalies Domestic crisis due to the importance of external factors Spread of global economic crises due to contagion Broad channels of Contagion Broad channels of contagion Real link Financial link Herding behaviour/panics Questions 1. What is the basis of Bretton Woods System? A. 24 caret Gold B. US Dollar C. Euro D. Japanese Yen Ans: B. US Dollar Questions 2. Which of the following is true in case of completely flexible exchange rate regime? A. Central Bank sells foreign currency to create demand B. Central Bank only interferes through monetary policy C. Central bank keeps large reserves of foreign currency. Ans: B THANK YOU