ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Lessons from the Field

Foreign Exchange, International Finance and Risk Management by A V Rajwade; 3rd edition, Academy of Business Studies, New Delhi, April 2000; pp xvi + 542, Rs 440.

The subject of international finance is developing faster than most other subjects in the field of economics. During the course of the last three decades, and especially in the last decade, the degree of international financial integration has increased enormously. All major country groups are experiencing vastly increased cross-border flows of money and capital. Almost as rapidly growing is the mass of serious literature that is trying to describe and understand these developments. Important new developments have appeared in areas as diverse as the behaviour of exchange rates within a target zone such as the exchange rate mechanism of the European monetary system (EMS); the theory of the optimal course of financial integration by countries previously divorced from the international circuit of capital; explanations for why real exchange rates wander away for long periods from purchasing power parity, so disturbing real economic activity; how misinformed speculation and speculative bubbles cause floating exchange rates to be unstable and largely unpredictable; and on how best to reform the international monetary system.

An international monetary system (sometimes referred to as an international monetary order or regime) refers to the rules, customs, instruments, facilities, and organisations for effecting international payments. International monetary systems can be classified according to the way in which exchange rates are determined or according to the form that international reserve assets take. A good international monetary system is one that maximises the flow of international trade and investments and leads to an ‘equitable’ distribution of the gains from trade among the nations of the world. An international monetary system can be evaluated in terms of adjustment, liquidity and confidence.

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