International Financial System and Capital Markets: A Brief Overview

Abstract

The purpose of this paper is to summarize the most important points that describe the international financial system as the framework that governs financial flows from movements of capital, goods and services. The international financial system encompasses financial markets and everything and everybody ranging from central banks to individual investors, with every possible variation of financial intermediary in the middle. Through analysis of source literature and contemporary body of research, the paper provides historical context of the evolution of the financial system, going from fixed to floating rates, and ultimately ending with managed floats. Moreover, it provides a synopsis how the system is working out exchange rates, and how it facilitates trade, investment, and financing, both short-term in the money markets or long-term in the capital markets. In this last iteration of the system, despite plentiful examples of financial crisis that have happened over the decades, most notably the Great Recession of 2008 and the Covid-19 pandemic induced crises, all financial markets have seen growth in volumes of trades and profits over the long-run. However, humanity is now faced with exceptionally tense geopolitical realignments and shifts in economic might among the economies that follow the USA. Before the US-China trade war, China was galloping toward reaching the top spot while Russia was banking heavily on Europe’s thirst for fossil fuels. What form will the international financial system ultimately take is uncertain, but worth pondering nonetheless. As long as the system remains rules-based in its essence, reforms are welcome.