The international finance and monetary system define a framework within which different countries can borrow, sell, lend, buy and make payments across all the political frontiers. This framework is responsible for resolving the disequilibrium among the balance of payments. There has been the introduction of several frameworks to the International Finance and Monetary System with the increasing volatility of exchange rates over the past 40 years.
Although such volatile exchange rates are sure to increase risk, these also amount in creating profit opportunities for different firms and investors if there is a proper understanding of exchange risk management. However, in order to efficiently manage the foreign exchange risk, the management team have to first understand how the international monetary system works.
So, what is the current scenario of the structure of international monetary systems?
Current Status of International Finance and Monetary System
Many experts and professionals have often questioned about the current scenario of the trends in the international monetary and financial systems. The answer to the corresponding question revolves around two facts:
- The dollar is still the major form of currency which is used in all types of international transactions. It is rather considered a medium of unchallenged dominance persisting alongside the economic and financial force.
- Bretton Woods has been dead for some time now but its child, IMF, has been there as a member of disequilibrium causing in balancing of the payments.
What Is IMF And Why Is Its Role Important?
International Monetary Funds is an important player responsible for laying the current grounds for International Finance and Monetary Systems. It was introduced to the framework so as to administer fair exchange practices as well as compensatory financial assistance by resolving difficulties of payments.
Let us take a look at the roles of IMF:
- The major role of IMF is to provide a framework of international monetary cooperation that can take care of international monetary problems.
- It is used for the facilitation of expansion and taking care of balanced growth with respect to effective international trade mechanisms by maintaining high-levels of employment as well as developing the necessary productive resources to its every member.
- Responsible for the promotion of exchange stability in order to maintain exchange arrangements among the members by avoiding the competitive exchange depreciation.
When a member enters the framework of IMF, it has to submit a par value of the currency either in gold or US dollars. Once such values are defined, all the transactions will occur at that rate only. This is the reason why the IMF classifies all the possible exchange rates into eight categories.
The Introduction of the World Bank
If you are a student of Finance, International Business or Accounting, and are questioning why it is important to understand the international monetary system, then you are not understanding the point. Because such frameworks have been acting as the major center point of all the transactions happening around the world. The World Bank or the International Bank for Reconstruction and Development (IBRD) was introduced at the same time as the IMF to tackle the problems related to international investment. IBRD was responsible for promoting long-term investment loans at optimum rates to help the member nation to exercise the growth opportunities within their countries.
Let’s look at IBRD functions below:
- Assisting in the reconstruction and development of the territories for its member nations with the facilitation of capital investment for productive purposes.
- Promoting all the private foreign investment that guarantees the participation in investment opportunities by means of making loans or from the borrowed funds.
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