Saturday, September 5, 2009

The Managed Floating Currency Standard

In the 1978 a new international payments system-often called a managed floating currency standard- was formally adopted by member nations of the IMF. known as the Second Amendment to the International Monetary Fund‘s Article of Agreement, the official rules under which today‘s international money system is supposed to operate allow each nation to choose its own exchange-rate policy, consistent with the structure of its economy and its economic goals. There are, however, three principles which each member country must follow in establishing its exchange-rate policy:
1- when a nation intervenes in the foreign-exchange markets to protect its own currency, it must take into account the interests and welfare of other IMF member countries.
2- Government intervention in the foreign-exchange markets should be carried out to correct disorderly conditions in those markets which are short term in nature.
3- No member nation should intervene in the exchange markets in order to gain an unfair competitive advantage over other IMF members or to prevent effective adjustments in a nation‘s balance-of-payments position.

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