INTERNATIONAL MONETARY AND FINANCIAL SYSTEMS
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 5
Learning Outcomes:
After studying this chapter, you should be able to:
1. Explain the meaning of the international monetary system
2. Explaining history development system international monetary system
3. Explain the transformation of the international monetary system
4. Explaining currency exchange rates (exchange rates)
5. Explain the meaning of international financial institutions
6. Explain what is meant by the foreign exchange market and the capital market
7. Explain International Financial Reporting Standards (IFRS)
A.
Introduction:
The international monetary system plays an important role in facilitating global trade
and investment by establishing rules, conventions, and institutions that support financial
transactions between countries. The system also helps stabilize exchange rates and facilitate
currency conversion for international trade and investment. In addition, it provides a
mechanism for managing financial crises and coordinating monetary policies among
countries. A stable and efficient international monetary system is essential for promoting
economic growth, facilitating cross-border transactions, and promoting economic growth
maintain global financial stability (Tavlas, 1997; Cooper, 1975; Black, 1985).
B.
Definition of the International Monetary System
The international monetary system involves official policies and regulations related to
exchange rates, international payments, capital flows, and international reserves that include a
number of institutions, rules, standards, and conventions that govern its operations
(Gourinchasy, Reyz, and Sauzetx, 2019; Santo and Schembri, 2011; Truman, 2010; Mundell,
2003). Developed countries with flexible exchange rates tended to reduce their reserve
holdings as a percentage of GDP after the post-Bretton Woods era. In contrast, in the last
decade, there has been a rapid accumulation of international reserves in developing countries
along with an increase in current account imbalances (Gourinchasy, Reyz, and Sauzetx, 2019;
Boorman and Icard, 2011; Truman, 2010; Mundell, 2003; Little and Olivei, 1999). In the face
of unbalanced international payments, countries can finance, change trade and investment
policies, and control foreign exchange or currency exchange rates to adjust international
payment imbalances (Gourinchasy, Reyz, and Sauzetx, 2019; Truman, 2010; Rey, 2001;
Mundell, 2003; Little and Olivei, 1999). This system has facilitated global expansion,
increased international trade and financial integration, as well as rapid global GDP growth
and an increase in foreign assets. Globalization, especially through trade and foreign direct
investment, provides the advantages of international market access, technology transfer, and
increased specialization, leveraging comparative advantages in production (Gourinchasy,
Reyz, and Sauzetx, 2019; Lane and Milesi-Ferretti, 2018; Truman, 2010). The system is
overseen by various complex institutions such as the IMF, BIS, FSB, and G-20, with the aim
of maintaining global financial and monetary stability (Gourinchasy, Reyz, and Sauzetx,
2019; Gallagher and Ocampo, 2013; Santo and Sauzetx, 2019) Schembri, 2011; Truman,
2010; Helleiner, 2008; Little and Olivei, 1999).
C.
History of the Development of the International Monetary System:
The international monetary system plays a major role in the context of global political
economy. Since the late 19th century, the initial formation of the international monetary
system has gone through various transformations to anticipate changes in the international
political and economic situation. One of the most dramatic changes occurred during the world
war period, which led to a crisis of integration in the international monetary system (Lane and
Milesi-Ferretti, 2018; Makhasin, 2015; Wardhana, 2014; Cetorelli and Goldberg, 2012;
Truman, 2010 D'Arista, 2009; Helleiner, 2008; Little and Olivei, 1999).
D.
Transformation of the International Monetary System:
The transformation of the International Monetary System includes several stages,
namely:
1. The first transformation in the international monetary system occurred in 1880 when
Britain, Germany, Japan and America adopted the gold standard system. In this system, the
value of each currency was conveniently measured in units of other currencies, facilitating
international trade. Initially, the value of US$1 was equivalent to 23.22 grains of pure gold or
1 ounce of gold worth 480 grains, equivalent to the U.S. dollar.
$20,67. The amount of currency needed to buy one ounce of gold is called the par value of
gold. However, the gold standard was abandoned during World War 1, and currencies were
no longer tied to gold or could use other currencies (Wardhana, 2014; Helleiner, 2008).
2. The second transformation in the international monetary system occurred after World
War II, on July 22, 1944 through the Bretton Woods agreement. The conference involved 44
countries and restored the use of the gold standard, where gold was traded only by central
banks. Currency rates were set based on gold at a fixed rate, where each country set its
currency exchange rate. Member countries were required to keep the exchange rate within an
interval of 1% of par and intervene to maintain stability. In 1946, the International Monetary
Fund (IMF) and World Bank were established to oversee this system. The IMF helps member
countries maintain currency values (Gallagher and Ocampo, 2013). Between 1944 and 1973,
the US Dollar became the main currency in international trade. European countries, needing
the US Dollar for economic recovery, led to an increase in global demand for the US Dollar.
As a result, the US Dollar displaced the role of gold, and each member set its currency ratio
to the US Dollar, which could be exchanged for gold if needed (Wardhana, 2014;
Eichengreen, 2011).
3. The third transformation in the international monetary system occurred in 1973, when
the gold exchange rate standard was replaced by the US dollar. This change was triggered by
market speculation pressures against a fixed exchange rate system that was deemed
untenable. Global financial markets shut down for several weeks in March 1973, and when
they reopened, currency rates floated freely, determined by market forces. From then on, the
international monetary system became a combination of fixed and freely floating exchange
rates. The value of world currencies fluctuates based on market supply and demand, with
countries having the ability to intervene in the foreign exchange market to reduce fluctuations
in the value of their currencies. A managed or dirty float system is used when a country has a
deficit in its balance of payments, while a clean float is when the central bank does not
intervene. Five European countries, such as West Germany, Belgium, Luxemburg, Sweden,
the Netherlands, and Norway, set their exchange rate systems individually, but can fluctuate
together against other countries' currencies, known as snake like (Ljungberg and Ögren,
2021). Although Europe and Japan have detached their currencies from the US dollar, the
dollar still plays an important role in international payment traffic, used by the IMF and the
United Nations (Ljungberg and Ögren, 2021; Wardhana, 2014; Kamasa, 2014; Obstfeld,
2013; Eichengreen, 2011; Caliari, 2011).
E.
Currency Exchange Rate (Kurs):
An exchange rate is a country's exchange rate agreement within the framework of
current or future international payments. The determination of the country's exchange rate
can be classified based on several experts, such as Bruno, Kim, and Shin (2018), De Conti
and Prates (2011), Wardhana, et al. (2014), Betts and Devereux (2000), as follows
1. Free Float. Free Float refers to the number of shares of a company that are publicly tradable
and not limited by certain restrictions which includes shares that can be traded on the stock
market and are not bound by special ownership or control, such as shares owned by major
shareholders or internal parties. It is important to note that Free Float can be calculated using
a formula that involves both outstanding shares and shares that are not subject to special
ownership or control Bound. The larger the Free Float of a company, the greater the liquidity
of its shares, allowing for more active trading in the stock market. Information on Free Float
becomes relevant in fundamental and technical analysis of stocks, helping investors and
analysts to understand the level of liquidity and potential fluctuations in stock prices. A good
understanding of Free Float can help investors make more informed investment decisions.
Examples of countries that use a free float monetary system are: United States, United
Kingdom, Australia, and Poland.
2. Managed Float. Managed Float is an exchange rate system where the currency can float
freely in the foreign exchange market, but the monetary authority or central bank of the
country engages in intervention to reduce exchange rate fluctuations. In this system, the
monetary authority can buy or sell its currency in the market to maintain exchange rate
stability. Unlike a fully free-floating exchange rate, where the exchange rate is fully
determined by the market mechanism, in Managed Float, the monetary authority has a role in
regulating the exchange rate. This system can provide stability and prevent large fluctuations
in the exchange rate, which can affect exports, imports, and overall economic stability.
Basically, Managed Float creates a balance between market freedom and government
intervention to ensure economic stability (Erten and Ocampo, 2014). Examples of countries
that use a managed float monetary system are: Japan, Mexico, Thailand, Brazil, South Korea,
and Chile.
3. Fixed Exchange Rate System. Fixed Exchange Rate refers to an exchange rate system in
which a country's monetary authority officially sets the exchange rate of its currency against
foreign currencies or in a fixed exchange rate system a specific basket of currencies. The aim
is to keep the value of the currency stable within a predetermined range. Under Fixed Rate,
the exchange rate is not allowed to float freely based on market mechanisms. Instead, the
monetary authority commits to active intervention in the event of significant exchange rate
fluctuations. This intervention may involve buying or selling currency to keep the exchange
rate in line with the set policy. This system provides certainty to economic actors, especially
exporters and importers, as they can rely on a stable exchange rate for their business
planning. However, the main challenge is to maintain stability in the long run, given market
pressures and changing global economic conditions (Gerko and Rey, 2017; Bruno and Shin,
2015; Gallagher, Jones and Ocampo, 2012). Examples of countries that use a fixed exchange
rate monetary system are: China, Hong Kong, Argentina, and Estonia.
4. Unofficial Pegging refers to the action of a country's Central Bank to counter market forces
by officially fixing its currency's exchange rate against the international payment system. In
this system, although there is no formal linkage to another currency's exchange rate or gold,
the Central Bank still intervenes actively to keep its currency's exchange rate fixed. This may
involve fixing the currency's exchange rate against other currencies or against a set of factors,
such as inflation and economic growth. Even if there is no formal agreement, the Central
Bank intervenes to prevent extreme fluctuations and keep the exchange rate stable. This
approach gives the Central Bank the flexibility to protect its currency without being tied to
formal obligations to the exchange rate system specific monetary system. Examples of
countries that use a monetary system unofficial pegging that is: Venezuela.
5. Target Zone Agreement in the Currency Exchange System. A Target Zone Agreement is a
form of currency exchange system in which several countries agree to jointly determine the
exchange rates of their currencies within a certain region. In this system, the countries set
upper and lower limits for the exchange rates of their currencies against each other. If the
exchange rate crosses the upper limit or lower limit, corrective action is taken to keep the
exchange rate within the predetermined range. The purpose of this agreement is to create
exchange rate stability within a given region. By cooperating in determining currency rates,
countries try to avoid too large fluctuations that could affect trade and economic stability.
This system reflects an attempt to control currency exchange rates through regional
cooperation, ensuring that fluctuations do not disrupt economic activity between countries.
Examples of countries that use the Target Zone Agreement in the Currency Exchange System
monetary system are: Germany (1987-1988).
6. Exchange Rate Coordination. The linking of a country's currency with that of a neighboring
country refers to cooperative measures between neighboring countries to maintain the
stability of their currencies and prevent excessive fluctuations. Some forms of coordination
include:
a.
Pegged Exchange Rates. Countries can agree to keep the exchange rate of their currency
fixed against a neighboring currency or a specific group of currencies. Examples of
countries that use Pegged Exchange Rates monetary systems are Uganda pegged its
currency, the Ugandan Shilling (UGX), to the United States dollar as part of its exchange
rate regime, Eswatini pegged its currency Lilangeni (SZL) to the US dollar, and Eswatini
pegged its currency Lilangeni (SZL) to the US dollar with the South African Rand,
Lesotho maintains its currency Loti (LSL) tied to the South African Rand, Namibia ties
its currency Namibian Dollar (NAD) to the South African Rand, Bhutan its currency
Ngultrum (BTN) tied to the Indian Rupee, Nepal its currency Nepali Rupee (NPR) tied
to the Indian Rupee.
b.
Market Intervention. Through market intervention, central banks can buy or sell their
currency to influence the exchange rate, maintain stability, and prevent unwanted
volatility. An example is Indonesia and the Philippines.
c.
Monetary Policy Coordination. Countries can coordinate in setting monetary policy,
including interest rates, to prevent large differences that can affect capital flows and
exchange rates (Sugandi, 2023). For example, Canada, the United States of America, and
Mexico (NAFTA), ASEAN-5 + 3 countries which include ASEAN-5 (Indonesia,
Malaysia, Singapore, Thailand, the Philippines) and CJK (China, Japan, and Korea).
7. Currency Pegging. Pegging to other currency groups can refer to various contexts, one of
which is in the context of currency policy and international economic relations. In this
context, pegging refers to an attempt by a country or group of countries to establish a close
relationship with another group's currency. Some of the aspects that may be involved in
linking with other currency groups include:
a.
Currency Policy Coordination. Countries may seek to coordinate their currency
policies with other currency groups to achieve common goals, such as economic stability
and growth. Examples include Australia (AUD), Canada (CAD), Chile (CLP), Saudi
Arabia, and Hong Kong.
b.
Currency Diversification. Efforts to diversify the currencies used in international
transactions, including with specific currency groups, can be part of a strategy to
strengthen economic stability. For example, efforts to reduce the use of US dollars by
using local currency payment systems as implemented in the Local Currency Settlement
policy.
c.
Use of Local Currency. Increasing the use of local currencies in settling international
transactions can also be an aspect of linking with other currency groups. For example,
three ASEAN countries, Indonesia, Malaysia and Thailand, agreed to strengthen cross-
border transactions by increasing the use of local currencies. This is an important step
towards strengthening cross-border transactions between ASEAN countries.
F.
Definition of International Financial Institutions:
International financial institutions (IFIs) are described as highly influential agents of
economic reform at the global level (Sidenko and Kulbida, 2020; Bradlow and Hunter, 2010;
Vieira, 2011; Halliday and Carruthers, 2007). IFIs, such as the International Monetary Fund
(IMF) and the World Bank, provide financial support to developing country governments
(Radwan, 2020; Lessambo, 2015; Vieira, 2011; Anwar, 2006; Zamagni, Ffrench-Davis,
Pietrobelli, 2000). The IMF and World Bank have a widespread dominant role in influencing
the economies of borrowing countries that request assistance (Radwan, 2020; Lessambo,
2015; Cissé, Bradlow, and Kingsbury, 2012; Vieira, 2011). IFIs' access to borrowing
countries' resources is determined by the extent to which they undertake internal policy
reforms, including the opening of access to international trade and finance, privatization of
natural resources, management of state-owned enterprises, deregulation, etc economic
activity, regulatory reform of social services, and various institutional changes (Emter,
Killeen, McQuade, 2021; Sidenko and Kulbida, 2020; Babb and Kentikelenis, 2018; Bekaert
and Hodrick, 2017; Vieira, 2011; Ocampo, Zamagni, Ffrench-Davis, Pietrobelli, 2000).
In most countries in the world, international financial institutions (IFIs) play an
important role in developing various socio-economic programs, especially in developing
countries and countries transitioning from poor to developing status, even to developed
countries (Radwan, 2020; Sidenko and Kulbida, 2020; Manukyan, 2020; Lessambo, 2015;
Narula, 2012; Vieira, 2011; Ocampo, Zamagni, Ffrench-Davis, Pietrobelli, 2000). IFIs play a
key role by evaluating development projects, providing funding, and assisting in their
implementation. Through the provision of loans, credits, and grants to borrowing
governments, IFIs support projects focused on economic development and social
sustainability. In addition, IFIs provide technical assistance and consulting to borrowing
country governments, and conduct comprehensive research on development issues in these
countries (Poghosyan, 2016; Lessambo, 2015; Vieira, 2011).
According to Sidenko and Kulbida (2020), Radwan (2020), Poghosyan (2016), and
Vieira (2011), the objectives of international financial institutions (IFIs) include: a) Reducing
global poverty and improving the living standards of citizens in borrowing countries. b)
Providing sustainable support for economic, social, and institutional development in
borrowing countries. c) Promoting regional cooperation and integration among borrowing
countries.
The global financial crisis, especially as a result of the monetary crisis and Covid-19,
created a crisis of confidence that spread throughout the international socio-economic system
(Nelson and Weiss, 2020; Manukyan, 2020). To avoid significant financial losses, the world
entered a new era of relations between states and international markets. Although
international financial markets are expected to recover from the crisis, socio-economic
recovery requires careful policies from various international financial institutions (Manukyan,
2020; Sidenko and Kulbida, 2020). Active coordination between national monetary
authorities and international monetary policies is important, while the development of new
international financial policies in the international banking system is considered an urgent
step to overcome gaps and accept new innovations in the field of international finance. This
also considers the differences in financial regulation between countries that have developed
(Sidenko and Kulbida, 2020; Madura, 2020; Vieira, 2011; Song and Thakor, 2010; Zamagni,
Ffrench-Davis, Pietrobelli, 2000).
International Financial Institutions (IFIs) include various institutions including:
International Monetary Fund (IMF), World Bank (WB), Asian Development Bank (ADB),
Brazil, Russia, India, China, South Africa (BRICS) Development Bank, European Bank
(EBRD), Islamic Development Bank (IDB) (Sidenko and Kulbida, 2020; Radwan, 2020;
Madura, 2020; Vieira, 2011).
1. International Monetary Fund (IMF)
The International Monetary Fund (IMF) is an institution within the international
economic and financial framework with almost universal membership globally. The IMF was
established in 1944 in response to the severe economic depression of the 1930s. The
establishment of the IMF took place during World War II in Bretton Woods, New
Hampshire, USA, involving 44 member countries with the aim of overseeing the international
monetary system and establishing a framework for international economic cooperation
(Naciri, 2018; Berensmann and Wolff, 2014). The IMF's current membership includes 190
countries with staff from 150 member countries. The IMF is operated and accountable to its
190 member countries (Júnior, 2020).
The IMF's financial resources come primarily from monetary contributions from
member countries as capital upon joining. Each IMF member is given a quota based on their
relative position in the global economy, and borrowing countries can borrow from the IMF
when facing financial difficulties (Vieira, 2011; Truman, 2006).
The IMF provides various types of loans, including emergency loans, to member
countries experiencing actual or potential payment difficulties. The aim is to help them build
international financial reserves, stabilize currencies, ensure the ability to pay import
transactions, and support economic growth by fixing underlying economic problems
(Bradlow and Park, 2021; Naciri, 2018; Vieira, 2011; Truman, 2006).
The IMF actively monitors the international monetary system and global economic
developments to identify risks, provide growth and financial stability policy
recommendations to borrowing countries. The IMF also conducts regular checks on
economic policies and member country finances and provide input on international financial
policy adjustments (Bradlow and Park, 2021; Júnior, 2020).
In addition, the IMF provides technical assistance and training to member country
governments, including central bank authorities, finance ministries, and financial supervisory
agencies, focusing on the IMF's core areas of expertise such as taxation, central bank
operations, and macroeconomic data reporting. These efforts also aim to help member
countries address cross-cutting issues such as income inequality, gender equality, corruption,
and the impact of climate change on finance (Bradlow and Park, 2021; Júnior, 2020; Takagi,
2016; Berensmann and Wolff, 2014; Vieira, 2011; Song and
Thakor, 2010).
The objectives of establishing the IMF (Bradlow and Park, 2021; Takagi, 2016; Vieira,
2011; Truman, 2006) are:
a.
Provide consultation and cooperation on international monetary issues faced by IMF
members.
b.
Promote exchange stability and maintain orderly exchange management among its
member countries, as well as facilitate international trade among them.
c.
Supports the creation and expansion of international markets, allowing member countries
to exchange currencies without restrictions.
d.
Build confidence in foreign currency stability through the creation of adequate financial
resources and protection from the IMF.
Various reports presented by the IMF include the World Economic Outlook, Global
Financial Stability Report, Regional Economic Report, and Fiscal Monitor.
2. World Bank (WB)
The World Bank (WB) was established in 1944 alongside the establishment of the IMF
in Bretton Woods, New Hampshire, USA. It is headquartered in Washington D.C., The
World Bank aims to provide loans for various development programs in 189 member
countries (Naciri, 2018; Berensmann and Wolff, 2014; Shams, 2004). Member countries, as
shareholders, are represented by a Board of Governors consisting of the finance or
development ministers from each country. Annual meetings of the Board of Governors of the
World Bank Group and the International Monetary Fund are held every year (Júnior, 2020).
Since 1947, the World Bank has financed over 12.000 project development via various types
of financing. The bank plays a role in various areas of development, providing financial
products and technical assistance, and supporting countries around the world by sharing
knowledge and innovative solutions to overcome the challenges they face (Júnior, 2020). The
World Bank organization is:
a.
The International Bank for Reconstruction and Development (IBRD) plays a role in
providing financing for economic development policies, including supporting physical and
social infrastructure projects, developing institutional capacity, and financing government
programs. IBRD also supports government policy and institutional reforms by providing
budget financing and global expertise. The World Bank, through research and analysis,
provides support to its member countries to design and implement better policies, strengthen
government institutions, build capacity, and contribute to the global development agenda
(Bradlow and Park, 2021; Júnior, 2020).
b.
The International Development Association (IDA) functions to provide low-interest loans
or interest-free grants. IDA funds are allocated based on the recipient country's income level
and record of success in managing the economy as well as IDA projects ongoing. IDA loan
terms are concessional (Bradlow and Park, 2021; Júnior, 2020; Shams, 2004).
c.
The International Finance Corporation (IFC) focuses on mobilizing private sector
investment and providing advice to its member countries. IFC provides investment, advice,
and asset management tailored to client needs (Bradlow and Park, 2021; Júnior, 2020).
d.
The Multilateral Investment Guarantee Agency (MIGA) is responsible for providing
political risk guarantees for development projects in its developing member countries. MIGA
offers insurance that benefits both investors and lenders (Bradlow and Park, 2021; Júnior,
2020).
e.
The International Center for Settlement of Investment Disputes (ICSID) plays a role in
resolving investment disputes, especially between investors and investment destination
countries. ICSID also provides solutions in international disputes between countries and
offers a fact-finding process before disputes arise (Bradlow and Park, 2021).
The World Bank has not only expanded the scope of its activities since its
establishment, but has also proven a real impact on the economic policies of many
developing countries (Shams, 2004; Zamagni, Ffrench-Davis, Pietrobelli, 2000). One
interpretation of the World Bank's activities is to deliver public goods through various
development projects, transform into a knowledge bank by introducing development ideas,
and apply research results in its daily operations. The Bank continues to change the scope and
scale of its operations in response to pressure from various interest groups (Berensmann and
Wolff, 2014; Song and Thakor, 2010; Shams, 2004).
Various reports presented by the IMF such as the Global Economic Prospect, World
Development Report, Ease of Doing Business Report, and Logistics Performance Index.
3. Asian Development Bank (ADB):
The Asian Development Bank (ADB) was established in the early 1960s as a financial
institution with an Asian focus, aimed at promoting economic growth and cooperation in the
world's poorest regions. The creation of ADB became a reality after a resolution was
approved at the first Ministerial Conference on Asian Economic Cooperation held by the
United Nations Economic Commission for Asia and the East in 1963. Manila, Philippines,
was chosen as the ADB headquarters which officially opened on December 19, 1966, with a
primary focus on the agricultural sector and 31 member countries.
ADB has a strong commitment to achieving prosperity, inclusiveness, resilience, and
sustainability in Asia and the Pacific. While working to eradicate extreme poverty, ADB
focuses on food production and rural development. The institution provides support to its
member and partner countries by providing loans, technical assistance, grants, and equity
investments to promote social and economic development. ADB makes the most of its
assistance by facilitating policy dialogue, providing advisory services, and mobilizing
financial resources through co-financing operations using official, commercial, and export
credit sources (Takagi, 2016; Jakupec and Kelly, 2015).
The purpose of establishing the Asian Development Bank (ADB) (Takagi, 2016;
Jakupec and Kelly, 2015) can be explained as follows:
a.
Support public and private sector investments in countries in the region to achieve their
national development goals.
b.
Utilize the full range of available resources to fund national development projects, giving
priority to developing countries in Asia.
c.
Help coordinate the national development policies and plans of developing Asian
countries, with the aim of improving resource utilization, strengthening economies, and
expanding foreign trade, especially among Asian countries themselves.
d.
Provide technical assistance for the preparation, financing, and implementation of
various development programs.
e.
Cooperate with other international organizations that have an interest in investing in
development in Asia.
4. Brazil, Russia, India, China, South Africa (BRICS) Development Bank
The BRICS Development Bank is shaping a new financial architecture, promising a
significant shift in economic growth and demand for financial assistance. It also offers an
alternative financing mechanism for developing countries. The decision to establish the
BRICS Development Bank reflects the concerns of five countries - Brazil, Russia, India,
China and South Africa - with the existing Bretton Woods institutions. They were
disappointed that some of their key demands were not accommodated, prompting them to
reform the international financial architecture (Naciri, 2018; Preet, Sapra, Mehdi, 2014).
The BRICS Development Bank aims to promote greater cooperation and reduce
dependence on developed countries. By referring to the practices and norms of regional
development banks such as the Asian Development Bank (ADB) and Corporación Andina de
Fomento / Development Bank of Latin America (CAF), the BRICS Development Bank seeks
to identify different ways to achieve its goals. Through a common development agenda, the
bank is committed to supporting BRICS member countries and developing countries outside
BRICS (Preet, Sapra, Mehdi, 2014).
The BRICS Development Bank also has a special responsibility to end extreme poverty
and reduce inequality for sustainable development, despite Brazil experiencing rising
inequality in recent years (Preet, Sapra, Mehdi, 2014).
5. Islamic Development Bank (IDB):
The Islamic Development Bank (IDB) was established in 1973 by a decision of a
meeting of foreign ministers of Islamic countries in Pakistan in 1970. The IDB aims to
promote economic and social development in Islamic countries. Headquartered in Jeddah, the
IDB has representative offices in 57 other member countries (Pericoli, 2020). One of the
main focuses of the IDB is to facilitate trade between Muslim countries and support financial
systems around the world by proposing profit-sharing schemes, which include both profits
and losses (Pericoli, 2020; Susanti, 2017).
6. European Bank for Reconstruction and Development (EBRD):
The European Bank for Reconstruction and Development (EBRD) was established in
the early 1990s with the aim of helping to build the post-Cold War era in Central and Eastern
Europe. The EBRD is determined to promote international market-oriented economic
progress and encourage private sector initiative and entrepreneurship. Today, the EBRD is
owned by 71 countries around the world, spread across 5 continents through the European
Union and the European Investment Bank. Each shareholder has a representative on the
Board of Governors, which has the authority of full discretion of the bank (Radwan, 2020;
Fender and McGuire, 2010).
G.
Foreign Exchange Market and International Capital Market:
The Foreign Exchange and International Capital Markets play a vital role in the global
economy, facilitating the exchange of currencies and trading of financial instruments
internationally providing a platform for businesses, financial institutions, and governments to
buy and sell currencies, manage risk, and invest in a wide range of assets. The Foreign
Exchange and International Capital Markets operate 24 hours a day, five days a week, across
multiple time zones, enabling continuous trading and liquidity. These markets are affected by
various factors such as geopolitical events, economic data releases, and central bank policies,
which can cause fluctuations in currency values and financial instrument prices.
Participants in the Foreign Exchange and International Capital Markets involve
commercial banks, investment banks, hedge funds, multinational corporations, and retail
traders. Each participant brings their own objectives and strategies to the market, contributing
to the dynamic nature of trading currencies and financial instruments. With its significance in
the global economy, the Foreign Exchange and International Capital Markets are watched by
analysts, economists, and policymakers who seek to understand their impact on trade
balances, exchange rates, and overall economic stability. Understanding the complexities of
the Foreign Exchange and International Capital Markets can provide valuable insights for
businesses and investors looking to engage in international trade and finance. The Foreign
Exchange and International Capital Markets also serve as a barometer of economic health and
can have a significant impact on global trade and investment flows. Understanding the
dynamics of the Foreign Exchange and International Capital Markets is important for anyone
involved in international business or finance.
According to Rahman (2019) and Anggitawati & Ekaputra (2018), the foreign
exchange market is a place or institution that conducts foreign currency trading. This place is
run by government banks, national private banks, and foreign private banks that have become
foreign exchange banks, as well as institutions that specialize in foreign currency trading
activities. Institutions that focus on foreign currency trading are known as money changers.
In the flow of international payments, foreign exchange is needed by importers, while
exporters act as recipients of foreign exchange.
The process of determining foreign exchange prices occurs through a market
mechanism that is influenced by demand and supply. There are several terms related to
foreign exchange rates, including:
1. The Buy Rate, shows the purchase price of foreign exchange by a bank/money changer
or when someone exchanges foreign exchange for rupiah.
2. Selling Rate, shows the selling price of foreign exchange by a bank/money changer or
when someone exchanges rupiah for foreign exchange.
3. The middle rate is the difference between the selling rate and the buying rate.
The main functions of the foreign exchange exchange involve transferring the
purchasing power of money between countries, providing credit for foreign trade, selling
foreign exchange, and facilitating international trade and international payments. Some of the
benefits of the existence of foreign exchange exchanges include the advancement and
smoothness of trade between countries, ease of cross-border payments, addition to the
country's foreign exchange reserves, increase in export and import activities between
countries to encourage global business growth, and increase in foreign exchange reserves that
support national development.
The capital market is a meeting place between those who have excess capital and those
who need capital. There are two types of markets in the capital market:
1. The bond market, where companies can issue debt securities known as bonds. This market
is an option for companies when they are unable to obtain additional capital through bank
loans.
2. The stock market, where companies can sell some of their shareholdings, and investors
have the ability to trade shares with other investors. Companies can fulfill their capital
needs in the stock market by selling their ownership shares to other parties.
An example of the Foreign Exchange (Forex) Market in Indonesia can be found in the
transaction of exchanging Rupiah for foreign currencies, such as the US Dollar, Euro, or
Japanese Yen. Commercial banks, financial institutions, and multinational corporations
actively participate in this market. The Capital Market in Indonesia involves transactions in
stocks, bonds, and other financial instruments. The Indonesia Stock Exchange (IDX) is the
main trading venue for stocks, while bonds are traded in the secondary capital market.
Investors can purchase shares of companies such as Bank Mandiri or Telkom, and Indonesian
government bonds as examples of participation in the Capital Market (Mulatsih et al., 2023;
Winarko et al., 2021; Qizam, 2021; Rahman, 2019; Anggitawati & Ekaputra, 2018;
Andaiyani & Falianty, 2018; Wahyudi & Sani, 2014; Nezky, 2013).
H.
The International Financial Reporting Standards (IFRS):
International Financial Reporting Standards (IFRS) are a set of globally recognized
accounting standards used for financial reporting. Under these standards, companies are
required to prepare their financial statements in a consistent and transparent manner,
providing relevant information to investors, creditors, and other stakeholders. IFRS aims to
improve the comparability and quality of financial information, making it easier for users to
analyze and make informed decisions. These standards cover various aspects of financial
reporting, including revenue recognition, financial instruments, and lease accounting.
Adhering to IFRS can improve the credibility and reliability of financial statements, thereby
benefiting the global business community. Adopting IFRS can also open up greater access to
international capital markets, as many investors and lenders prefer companies that follow
these standards. In addition, harmonizing accounting practices across different countries can
simplify the financial reporting process and facilitate cross-border transactions. Companies
operating in multiple jurisdictions may find it particularly advantageous to adopt IFRS, as it
can simplify the consolidation of financial statements and improve consistency in reporting
(IFRS, 2022; Salah, 2020; Ghosh et al, 2020; Bui et al., 2020; Cheikh & Rejeb, 2020;
Septriana & Fuad, 2020).
Furthermore, as the global business landscape continues to evolve, maintaining
continuity with international accounting standards is critical for companies to maintain
competitiveness and demonstrate their commitment to transparency and accuracy in financial
reporting. Implementing and adhering to IFRS can ultimately contribute to a company's long-
term success and credibility in the eyes of investors and stakeholders. IFRS also plays a
significant role in improving corporate accountability and governance. By providing a
common language for financial reporting, these standards facilitate better communication and
understanding among stakeholders, strengthening the principles of accountability and ethical
behavior (IFRS, 2023; Kumar, 2015; Septriana & Fuad, 2020).
In addition to the benefits mentioned, IFRS can also simplify the merger and
acquisition process, as it allows the evaluation and comparison of financial statements from
companies operating in different jurisdictions. This can lead to smoother integration and
consolidation of financial information, reducing complexity and increasing efficiency in
business combinations. Furthermore, ongoing updates and revisions to IFRS ensure that these
standards remain relevant and reflect the evolving financial environment, providing
companies with the necessary framework to adapt to changes in the global economy and
regulation (IFRS, 2023; Bertrand et al., 2021; Srivastava & Kulshrestha, 2019; Kumar, 2014).
It is important for companies to stay informed about updates and changes in IFRS to
ensure compliance and maintain the integrity of financial reporting. By doing so, they can
effectively navigate the complexities of international financial markets and demonstrate their
commitment to transparency and accuracy in financial reporting. As IFRS becomes more
widespread, companies are increasingly recognizing the importance of staying in line with
these global accounting standards. The benefits of IFRS compliance are significant, ranging
from increased comparability and transparency to better access to international capital
markets. In addition, the simplification of financial reporting processes and the facilitation of
cross-border transactions further demonstrate the advantages of adopting IFRS (IFRS, 2023;
Makhmudova, 2023; Nayak et al., 2020; Septriana & Fuad, 2020). With these benefits in
mind, companies are encouraged to give priority on ongoing compliance and awareness of
the IFRS framework. Staying informed of the latest developments in IFRS not only ensures
that the company remains compliant with the standards but also puts it in an effective
position to navigate the complexities of international financial markets. Commitment to
transparency and accuracy in reporting These financials can strengthen a company's
reputation and credibility, building trust among investors and stakeholders. In addition, the
inclusion of IFRS in school and college curricula can play an important role in preparing
future accountants and auditors for the global accounting landscape. (IFRS, 2022; Septriana
& Fuad, 2020; Rouse, 2005).
I.
Summary:
The international monetary system involves official policies and regulations regarding
exchange rates, international payments, capital flows, and international reserves that include a
number of institutions, rules, standards, and conventions that govern its operations.
The international monetary system plays a major role in the context of global political
economy. Since the late 19th century, the initial formation of the international monetary
system has gone through various transformations in anticipation of changes in the
international political and economic situation. One of the most dramatic changes occurred
during the world war period, which led to a crisis of integration in the international monetary
system.
The first transformation in the international monetary system occurred in 1880 when
Britain, Germany, Japan, and America adopted the gold standard system. In this system, the
value of each currency was measured easily in units of other currencies, facilitating
international trade. The second transformation in the international monetary system occurred
after World War II, on July 22, 1944 through the Bretton Woods agreement. The conference
involved 44 countries and restored the use of the gold standard, where gold was traded only
by central banks. Currency rates were set based on gold at a fixed rate, where each country
set its currency exchange rate. The third transformation in the monetary system In 1973, the
gold exchange rate standard was replaced by the US dollar. This change was triggered by
market speculation pressure against a fixed exchange rate system that was deemed untenable.
Global financial markets shut down for several weeks in March 1973, and when they
reopened, currency rates floated freely, determined by market forces.
An exchange rate is a country's exchange rate agreement within the framework of
current or future international payments. The determination of the country's exchange rate
can be classified as Free Float, Managed Float. Managed Float, Fixed Rate, Unofficial
Pegging, Target Zone Agreement in the Currency Exchange System, Exchange Rate
Coordination, Currency Pegging.
International Financial Institutions (IFIs) are highly influential agents of economic
reform at the global level. International Financial Institutions (IFIs) include various
institutions including: International Monetary Fund (IMF), World Bank (WB), Asian
Development Bank (ADB), Brazil, Russia, India, China, South Africa (BRICS) Development
Bank, European Bank (EBRD), Islamic Development Ban (IBD).
The Foreign Exchange and International Capital Markets involve commercial banks,
investment banks, hedge funds, multinational corporations, and retail traders. An example of
the Foreign Exchange (Forex) Market in Indonesia can be found in the transaction of
exchanging Rupiah for foreign currencies, such as the US Dollar, Euro, or Japanese Yen.
Commercial banks, financial institutions, and multinational corporations actively participate
in this market. The Capital Market in Indonesia involves transactions in stocks, bonds, and
other financial instruments. The Indonesia Stock Exchange (IDX) is the main trading venue
for stocks, while bonds are traded in the secondary capital market.
International Financial Reporting Standards (IFRS) are a set of globally recognized
accounting standards used for financial reporting. Under these standards, companies are
required to prepare their financial statements in a consistent and transparent manner,
providing relevant information to investors, creditors and other stakeholders.
J.
Practice Questions
1. Explain definition of definition system international monetary system?
2. Explain history development of system international monetary system?
3. Explain the stages of transformation of the international monetary system?
4. Explain the meaning of currency exchange rates (kurs) and the existing exchange rate
systems?
5. Describe the forms of international financial institutions?
6. Explain the benefits of International Financial Reporting Standards (IFRS)?
K.
Group Discussion:
International Monetary Arrangements: The European Union and the Euro:
The EU's goals of implementing a single currency and supporting monetary policy
remain on target. In January 1999, a landmark achievement occurred when 11 countries
(Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands,
Portugal and Spain) linked their currencies to the Euro and maintained it throughout the year.
Despite having very different national compositions, the momentum of monetary unification
appears positive and directional. However, the effort is far from over. The vastly different
economic policies within the Eurozone have the potential to delay currency substitution and
maturation. European centralized monetary planning. Welfare contributions, taxation, capital
market integration, and nationalism are big issues that require major cooperation and
planning. Economic convergence is necessary for the Euro to become a major currency.
Minor issues such as dual currency usage periods, communication, and symbolism always
exist, further reinforcing suspicion and doubt. Operational issues such as conversion costs,
policy implementation, and reduced monetary control also contribute to pessimism towards
the Euro. The euro and the EU's complementary monetary policy eliminated national
currencies and removed strategic monetary tools such as exchange rate manipulation and
money creation. This makes fiscal policy the primary monetary control at the national level.
1. What is the problem faced in the above case?
2. What policies should EU countries adopt to address this?
