International Finance

What is 'International Finance'

International finance – sometimes known as international macroeconomics – is a section of financial economics that deals with the monetary interactions that occur between two or more countries. This section is concerned with topics that include foreign direct investment and currency exchange rates. International finance also involves issues pertaining to financial management, such as political and foreign exchange risk that comes with managing multinational corporations.

BREAKING DOWN 'International Finance'

International finance research deals with macroeconomics; that is, it is concerned with economies as a whole instead of individual markets. Financial institutions and companies that conduct international finance research include the World Bank, the International Finance Corporation (IFC), the International Monetary Fund (IMF) and the National Bureau of Economic Research (NBER). There is an international finance division at the U.S. Federal Reserve that conducts analysis of policies that are relevant to U.S. capital flow, external trade and development of markets in countries around the world.

Key Concepts

Concepts and theories that are key parts of international finance and its research include the Mundell-Fleming model, the International Fisher Effect, the optimum currency area theory, purchasing power parity and interest rate parity.

The Bretton Woods System

The Bretton Woods system, which was introduced in the late 1940s, after World War II, established a fixed exchange rate system, having been agreed upon at the Bretton Woods conference by the more than 40 countries that participated. The system was developed to give structure to international monetary exchanges and policies and to maintain stability in all international finance transactions and interactions.

The Bretton Woods conference acted as a catalyst for the formation of essential international institutions that play a foundational role in the global economy. These institutions – the IMF and the International Bank for Reconstruction and Development (which became known as the World Bank) – continue to play pivotal roles in the area of international finance.

Significance

International or foreign trading is arguably the most important factor in the prosperity and growth of economies that participate in the exchange. The growing popularity and rate of globalization has magnified the importance of international finance. Another aspect to consider, in terms of international finance, is that the United States has shifted from being the largest international creditor (lending money to foreign nations) and has since become the world's largest international debtor; the United States is taking money and funding from organizations and countries around the world. These aspects are key elements of international finance.