Outlook for International Monetary System Essay

Outlook for International Monetary System - Essay Example The system was designed to ensure a world of full employment and economic growth. Exchange rates are assumed to reveal fundamental supply as well as demand conditions, which, sequentially, ought to be associated with fundamental macroeconomic and other primary factors. Undeniably, the academic literature offers constructive confirmation of the relationship between exchange rates and basics in the long term. Nonetheless, exchange rates frequently diverge considerably from values implied by fundamentals and equality conditions in the short term, even in well-functioning markets (Sarno and Taylor, 2002). The cut off between short-term exchange rate levels as well as macroeconomic basics may make a position for sterilized involvement, which affects the exchange rate mostly through its impact on the prospect, risk premiums, as well as order flow. Especially, sterilized intervention can be used to stop unnecessary exchange rate movements resulting from short-term shocks that do not influence fundamental macroeconomic conditions. For economies experiencing macroeconomic imbalances or structural weaknesses, intervention can assist for the time being effortlessness exchange rate pressures merely if there is a reliable commitment to, and tangible progress on, macroeconomic as well as structural adjustments. A crucial element in international monetary reform is the improvement in the balance of payments adjustment process. There is widespread agreement that this improvement requires more flexible exchange rates than under the Bretton Woods system, and the Jamaica agreement legitimizes flexible rates. Yet there have been objections that greater exchange rate flexibility will be detrimental to the less developed countries, as well as claims that the LDCs have already been injured by the Smithsonian realignment of exchange rates in December 1971, the February 1973 dollar devaluation, and the floating of major currencies thereafter.  Ã‚