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INTERNATIONAL MONETARY SYSTEM
T
he international monetary system (IMS) refers to the customs, rules, instruments, facilities, and organisations facilitating international (external) payments. Sometimes the IMS is also referred to as an international
monetary order or regime.1 IMS can be classified according to the way in which exchange rates are determined (i.e., fixed currency regime, floating currency regime or managed exchange regime) and the form foreign reserves take (i.e., gold standard, a pure judiciary standard or a gold-exchange standard).
An IMS is considred good if it fulfils the following two objectives2 in an impartial manner:
(i) maximises the flow of foreign trade and foreign investments, and
(ii) leads to an equitable distribution of the gains from trade among the nations of the world.
The evaluation of an IMS is done in terms of adjustment, liquidity and
confidence which it manages to weild.
It refers to the process by which the balance-of-payment (BoP) crises of the nations of the world (or the member nations) are corrected. A good IMS tries to minimise the cost of BoP and time for adjustment for the nations.
It refers to the amount of foreign currency reserves available to settle the BoP crises of the nations. A good IMS maintains as much foreign reserves to mitigate such crises of the nations without any inflationary pressures on the nations.
It refers to the faith the nations of the world should show that the adjustment mechanism of the IMS is working adequately and that foreign reserves will retain their absolute and relative values. This confidence is based on the transparent knowledge information about the IMS.