International Monetary Systems and the Global Financial Crisis

Topics: Monetary policy, Central bank, Federal Reserve System Pages: 12 (3639 words) Published: July 18, 2013
International Monetary Systems and the Global Financial Crisis

Module Code: 56357
Module Title: International Finance and Investments
Module Leader: Dr. Jerome Healy
Student ID: 201113703
Submission Date: 10/04/2013
Word count: 3051 (Excluding abstract, contents, references & Appendixes)

Nowadays more than one billion population in all use US dollar and Euro which was born in January 1st, 1999 and officially circulated in January 1st, 2002 and 1.5 billion population use Chinese Renminbi in the world. That is to say, there are almost three billion people that are a half of the whole population of the world using US dollar, Euro and Chinese Renminbi. World economy has experienced a process of American subprime mortgage crisis, American financial crisis, global financial crisis and global substantial economy crisis in just a few years. US dollar got a heavy toll because of the global financial tsunami caused by the bankrupt of Lehman Brothers in September 15th, 2008. Federal Reserve Board (FRB) had responded that they injected liquidity to the financial system to increase the confidence to the market. At present the financial tsunami starts to influence the second largest money, Euro and the result of Euro still cannot be predicted. After more than thirty years’ reform and opening, the GDP of China has increased by the fastest speed in the world. Whether Chinese Renminbi can be influenced by the global financial tsunami is concerned. This essay will first compare the reactions taken by the monetary authorities in US dollar, Euro and Chinese Renminbi systems to response the global financial crisis. Then it will analyze the role of central bank and the use of monetary policy and fiscal policy in managing a single currency and discuss the actions taken to support the banking system and manage sovereign debt problems. Finally, it will refer to the conditions required for successful operation of a single currency covering many states.

The Mundell-Fleming model (IS-LM-BoP model) and the Impossible Trinity

IS-LM Model is expressed by means of plane coordinate system, in which Y presents the output determined by economic demand and I present the interest rate. IS curve expresses equilibrium conditions of goods market and LM curve expresses that of money market. The relationship among the macroeconomic variable can be analyzed via observing the equilibrium conditions in the two markets.

The Impossible trinity is a trilemma in international economics which states that it is impossible to have all three of the following at the same time: fixed exchange rates, sovereign Monetary Policy and free capital flow (financial integration).

If a nation were to adopt position a, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.

The reaction of monetary authorities in the monetary systems to the global financial crisis

The financial storm became increasingly fierce that brought a strong shock to American and even the worldwide financial market. World major Central Bank represented by European Central Bank had to adjust their own monetary policies timely to adapt the need of domestic and overseas economic development.

After American subprime mortgage crisis developed into global financial turbulence, FRB and the Central Bank of various countries in the world carried out different monetary policies and fiscal policies according to the different ideas and situations. To stimulate the economy and restore stability to financial markets, American monetary authority (FRB) took some crisis intervention measures successively on the basis of the turn of events. The major measures are the following.

1. Cutting interest rate and practicing excitant monetary policies 1.1 Promoting open-market operation. For reducing market interest rate, the Federal Reserve Board mainly via open-market...
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