Keiser University Brigham and Ehrhardt Discussion – Description
Brigham and Ehrhardt (2022) argue that the IMF initially had three primary functions: overseeing a pegged (but adjustable) exchange rate system, promoting currency convertibility to foster international trade, and acting as a lender of last resort for countries facing short-term balance of payments crises. Some functions have changed, but the original goals must be clarified. The Special Drawing Right (SDR) is an international reserve asset created by the IMF to supplement existing foreign exchange reserves. It serves as a unit of account for the IMF and other international and regional organizations, and is also the base against which some countries peg the exchange. Brigham and Ehrhardt (2022) posit that the IMF no longer presides over a system of fixed exchange rates, as documented by Brigham and Ehrhardt (2020), since no such system exists. However, it still aims to monitor the world’s monetary system and provide financial support (attached policy conditions). In addressing issues in the Bretton Woods, Brigham and Ehrhardt (2022), it was noted that the current arrangement negotiated at Bretton Woods and monitored by the IMF worked well during the post-WWII reconstruction era and growth in world trade. However, widely diverging monetary and fiscal policies, differential inflation rates, and various currency shocks led to this system’s demise. The U.S. dollar became the main reserve currency held by central banks, resulting in a consistent and growing balance of payments deficit. This requires a heavy capital outflow of dollars to finance these deficits and meet the growing demand for dollars from investors’ businesses. Eventually, foreigners’ heavy overhang of dollars resulted in a lack of confidence in the U.S.’s ability to meet its commitment to convert dollars to gold. The lack of confidence forced President Richard Nixon to suspend official purchases or sales of gold to the U.S. Treasury on August 15, 1971. Has the IMF lost its relevance to the world’s wealthiest countries from the literature you have read thus far (Brigham and Ehrhardt (2020)?
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