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Glossary - Termes financial

Asymmetric shocks

Transitory imbalance between two regions arising from a sharp change in economic conditions. For example, the collapse of the steel industry resulted in unemployment blackspots in steel-producing regions.

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Balance of payments

This measures a country’s incomings and outgoings of money. The balance of current payments is obtained by adding to the trade balance (the difference between exports and imports of goods), the services (transport, insurance) and foreign payments (the transfers of money back to their countries by émigrés, the revenue from capital invested abroad). 

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The Bank of International Settlements (BIS)

Established on 17 May 1930, the BIS is the world's oldest international financial organisation. Its head office is in Basel. It fosters international monetary and financial cooperation and serves as a bank for central banks*. Its objectives are promoting monetary and financial stability Hereto, it serves as:

  • a forum to promote discussion and policy analysis among central banks and within the international financial community
  • a centre for economic and monetary research
  • a prime counterparty for central banks in their financial transactions
  • agent or trustee in connection with international financial operations

 

See also : www.bis.org/about/index.htm

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Bretton Woods

At Bretton Woods (New Hampshire) a conference was held in July 1944 laying down the bases of the international monetary system which remained in force until 1971.  The system was based on rates of exchange fixed around the dollar, convertible into gold.  It was monitored by the IFM, and the World Bank had to make payments to poor countries. The conference discarded the proposals of John Maynard Keynes (UK), who suggested the creation of an international currency (Bancor) issued by an international bank.  The Bretton Woods conference achieved most of its aims in the medium term, but the limited nature of the reforms proposed,  making the international monetary system dependent on the balance of payments situation of the United States, could only mean postponing the problem for the longer term.

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Buying rate

Exchange rate at which banks purchase a currency. Central bank purchases to support a currency are also at this rate.

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Central exchange rate (also called "pivotal rate")

Exchange rate normally situated mid-way between the buying and the selling rates.

Central bank

Institution playing the role of banker’s bank and conducting monetary policy. Usually, the lender of last resort for a currency.

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Clearing

The settlement of two reciprocal debts through the payment of the difference by the holder of larger.  The French term for this is “Compensation”   For instance, European railways pay each other the difference between the portion of the fares collected in their countries for journeys made partly abroad.  A country’s debts in foreign currency are “cleared”  through exchanges among central banks.

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The community method and the intergovernmental method.

The « community method » designates, since the beginning of European construction, the mode of institutional operation within the Communities, based on a permanent dialogue between the interests of the member states and the common interest.  The Commission makes the proposals (and has the so-called « initiative monopoly », the Council decides (either unanimously or by qualified majority) along with the Parliament (by co-decision in a number of cases), and the Court of Justice concludes the matter.

The « intergovernmental method » is based upon a logic of intergovernmental cooperation.  The member states cooperate between themselves directly (via the Council and the European Council) without recourse to European institutions.  Decisions are by unanimity.

Following the evolution of the structure of the Communities, the « community method » concerns only the first pillar of the European Union (EU).  The « intergovernmental method » belongs to the second pillar and the third pillar.  The role of community institutions in the latter two pillars is, indeed, marginal.

The term « communitisation » is used to describe the passage of an area under intergovernmental control to the first (community) pillar

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Continuous Linked Settlements (CLS)

CLS is an organisation set up by the major international banks in order to facilitate money exchanges amongst themselves.  Technically the CLS is a bank rgulated by the American Federal Reserve Board.  The CLS has 56 members and 711 institutions which participate in the system. In 2007 the CLS operated in 15 currencies.

en.wikipedia.org/wiki/Continuous_linked_settlement

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Convertibility

The capability of a currency to exchanged against gold or another currency. In 1971, the abandonment of dollar convertibility against gold marked the start of a period of monetary instability which led Europeans to create their own monetary system.

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Credit system

Credit is the exchange of a good (money, for instance) made currently available against the promise of settlement later.  So there is credit every time the things supplied by two parties are disassociated in time.  The time factor is crucial because of the risks that it implies and the possible loss of the intrinsic value of the good exchanged.  The mutual credit system is a collection of banks or financial institutions which provide credit to each other on a mutual basis.

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Currency

Any means of foreign payment; most often, synonymous with foreign money.

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Euro- and euro

Used as a prefix, this designates a currency held in a bank established in a country other than that which issues the currency.  In this way, eurodollars are stocks in dollars held by foreigners outside the United States.  It is estimated that 60% of  US currency is held by people, etc.  who are not US citizens.   The prefix “euro” has nothing to do with Europe.  One exception is:  the eurocent, which designates the fraction of the European currency.

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European Payment Council (EPC)

The EPC was created in 2002.  This inter-bank body brings together some fifty banks of the European Union, in addition to three professional banking organizations (the European cooperative banks group, the European banking federation, and the European group of savings institutions).

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Exchange rate

This is the same as the rate, or “price”, of a currency. There is a “buying” rate and a “selling” rate, and the difference between them is linked to the costs of exchange and the risk of any change in the rate. These rates are usually equidistant from the central rate (“pivot” rate in French). In an international fixed exchange rate monetary system, this rate is set by the member States for variable periods.  On the other hand, in a floating exchange rate system, it is the market alone that determines the rates.  It differs from the “compensation” (conversion?) rates in the sense that the compensation (conversion?) rate no longer “changes” because there is no longer a risk of “change” (exchange?). That’s why the rates fixing the currencies participating in the euro zone to the euro are “compensation” (conversion?) and not “exchange” rates.

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Executive prerogative

Any right conferred upon the executive authority of a country such as, for example, the right to coin money. It follows that all matters relating to money are the responsability of powers beyond the influence of ordinary citizens who, as a result, take little interest in monetary affairs or consider them wholly bound the decisions taken by the relevant authorities.

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Fiduciary money

Banknotes and coins. Their values depends upon continued confidence in the issuer, usually a central bank.

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Financing through intermediaries

These are loans granted by banks which collect deposits and issue bonds.  This type of financing is one of the two ways by which the economy finances its development.  The other way is through direct recourse to the capital markets.

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Floating of currencies

Currency floating occurs when there are no restrictions on exchange rate fluctuations. In such a situation, fixed exchange rates, tunnels and snakes are abandoned. A distinction can be made between strong currencies wich appreciate in relation to others, and weak currencies, wich depreciate on a regular basis. Daily variations in exchange rates cab be considerable. These fluctuations, and even more so, alignment or currencies, are considered a hindrance to international trade. Misalignements happen when, for some reason or another, official axchange rates do not reflect the actual strength of a currency in terms of the competitivity of the economy it represents. Acurrency is defined as stable in external terms, when variations in its exchange rate against the principlal international reference currencies remain limited.

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Fluctuation tunnel

For the currencies that are in it, this determines the limits within which rates of exchange may fluctuate.  The central banks must buy too weak a currency or sell too strong a currency on the markets in order to keep the rates within the tunnel’s limits.  

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Gini Coefficient

 (see  Lorenz Curve)

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Gross Domestic Product (GDP)

Value of wealth created in a year within a country. GDP denotes a country’s economic strength.

Gulf Stream

A warm Atlantic sea current, the Gulf Stream influences the Atlantic and Northern regions of Europe – from Spain to Northern Russia.  This current brings warm water from the Gulf of Mexico and along the European coast, acting to moderate considerably temperatures. The effect of this warm current can be seen from the considerable difference in mean temperatures between the two coasts of the Atlantic.

Hegemony

The supremacy of a State or nation within a system.  The term is used in the world of finance, when those participating in a monetary system seek the supremacy of one single country or one single central bank to guarantee its equilibrium.

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Inflation

Tendency for the price of goods and services to increase. When there is high inflation, money “loses value” because the same amount buy less in the future than today. Low inflation preserves a currency’s intrinsic value, known as its internal stability.

Intergovernmental

Is said of arrangements in which governments of the Member States have the final word on decisions. This system is characterised by the vote by unanimity : no decision can be taken without each government agreeing. In this system, the collective interest is generally sacrificed for the interest of one or more countries. Each State, knowing that their vote is indispensable to have a proposal approved, can blackmail the other partners, asking their support in a totally unrelated matter as a condition for approving the proposal submitted. This system is undemocratic in so far that countries representing only a fraction of the EU population can impose its will on the majority.  In EU jargon, this system is opposed to the “community procedure”.

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Intergovernmental Conference (IGC)

The term Intergovernmental Conference (IGC) designates a negotiation between governments of member states, whose objective is to modify treaties as part of the process of Eurpopean integration. These conferences have played a major role in the effort toward European integration, in the sense that all institutional changes ought to be the fruit of negotions between member states.  They take place behind closed doors, in presence of only representatives of the member states.  With rare exceptions these conferences have not responded to the expectations of citizens regarding political integration. It is this failure which led the member states to call together a « Convention »  to prepare the Constitutional Treaty in 2004.
europa.eu/scadplus/glossary/intergovernmental_conference_fr.htm

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International Monetary Fund (IMF)

Created at Bretton Woods*, the objective of he IMF (located in Washington D.C.) was until 1970, the stabilisation of exchange rates and the convertibility of currencies*. The IMF has become a permanent forum for the exchange of views where problems that could affect the international monetary system are resolved through consultation among member countries thereby avoiding persistent disputes. TO increase international monetary reserves, the IMF issues Special Drawing Rights (SDR)*. These are international units of account which have, however, never acquired the monetary character of the ecu. Conscious of the numerous problems still outstanding, the participants in the Bretton Woods* Conference  created the International Bank for Reconstruction and Development (IBRD), today called the World Bank. The latter’s initial role to finance the reconstruction of war torn Europe and to develop the Third World was extended to assisting world development.

See also : www.imf.org/external/index.htm

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Issuers of notes and coin

Institutions whose entire capital is held by the state which accords the the sole right to issue legal money: notes and coin. Generally, these institutions are central banks.

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Legal tender

Term applied to a means of payment that one is obliged to accept at its face value (that which is inscribed on the note or coin). Notes and coins of a country’s currency have legal tender in that country, since all parties are legally obliged to accept them. This is not the case with foreign currency.

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Lender of last ressort

Role played by the central bank when its lends to banks to increase their liquidity or, exceptionally, to prevent a snowballing series of  bankruptcies in the sector.

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Liquidity

This is said of the ease with which one financial asset can be converted into another.  Of the assets owned by someone (money, investments in real estate, shares, bonds, etc…), money is obviously the most “liquid”.  Other assets, like savings accounts, for instance, are relatively “liquid”.

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Lisbon Strategy

A strategy elaborated by the member states during the European summit in Lisbon in March 2000, in view to making the European Union  the most competitive and dynamic knowledge economy in the world by 2010, capable of a long-term economic growth accompanied by a qualitative and quantitative amelioration in employment and and a greater social cohesion ».

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Lorenz Curve

Let us suppose that the family units in a population were classed in deciles (1st: bottom 10%, 2nd: : next 10% etc., up to 10th : top 10%)  in order of revenue, as shown in the table below:
(?? on my screen the numbers are broken: eg. 14 = 1 with a 4 underneath)

 

Deciles

a

b

c

d

e

f

g

h

i

j

Total

Revenue

1

3

4

6

6

7

9

14

20

30

100

Cumulative Revenue

1

4

8

14

20

27

36

50

70

100

330

Cumulative Revenue under perfect equality

10

20

30

40

50

60

70

80

90

100

550

Cumulative Revenue under perfect inequality

0

0

0

0

0

0

0

0

0

100

100

 The second line of the table indicates the global revenue for each decile, from the lowest (1) to the highest (30).  The third line indicates the cumulative revenues: 1 for the first decile, 4 (1+3) for the first two deciles,  8 (1+3+4) for the first three, etc.  It follows that, for the 10 deciles the cumulative revenue is equal to the revenue of the whole population = 100.  The second last line shows us what would be if the distribution of income were pefectly equal.  The last line shows the contrary situation (total inequality) where the 10% richest have all the revenue, leaving none for the remaining 90%.

The Lorenz curve is the graphic transposition of these data onto a square 100 to each side.  On the bottom horizontal there are 10 points – a, b, c, etc. - corresponding to the 10 deciles.  On the vertical we measure the cumulative revenue corresponding to each of the 10 points, then place each of the points in the interior of the square (a1), (b4), (c8) .. up to (j100).  The curve formed by joining the points is the Lorenz curve.  In the case of perfect equality, the 10 points will form a straight line (a10), (b20), (c30), etc. which will form the diagonal of the square.  This is what is called the « Communist » economy.  In the case of perfect inequality the 10 points will be (a0),(b10) .. (j100) and the Lorenz curve will simply follow the bottom horizontal until it jumps to the top at the last point.  Economies which approach this extreme  are called « apartheid » or « Brazilian ».

The more the Lorenz curve approaches the diagonal of the square, the more the distribution of revenue is egalitarian.  The contrary is also true: the more the curve deviates from the diagonal the more the distribution is one of inequality.  This situation can be expressed with a single number, called the Gini coefficient, which is obtained by measuring the area between the Lorenz curve and the diagonal as a fraction of the total area under the diagonal.  This is, in fact, the sum of the gap between the cumulative revenue for each decile (the  3rd  line) and the points representing perfect equality  (4th line) divided by the total of the third line.  The value of the Gini coefficient is 0 in the case of perfect equality and 1 in the case of perfect equality.

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Margin of fluctuation

The limit put on a currency’s variation in relation to its reference point/currency.

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The Marshall Plan

An aid plan for the reconstruction of the European economy financed by the United States after the Second World War.  It bears the name of the US general who was Secretary of the Department of State (1947-48).  It was at the source of the European currency through the creation of the European monetary unit, introduced at the behest of the Americans in order to facilitate the distribution of the Plan’s funds to the different European governments. en.wikipedia.org./wiki/Marshall_Plan

www.oecd.org/document/10/0,2340,en_2649_201185_1876938_1_1_1_1,00.html

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Means of payment

 

The chosen method, defined by law or by custom, for making payment for goods or for settling debts. Normally, the chosen method is money, but other methods are used from time to time.

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Monetary reform

In a monetary reform another monetary standard or basic principle is selected.  So the introduction of the euro is not a monetary reform, since this  replaces national currencies at the rate applying at the precise time of the country’s entry into the Euro Zone (which, for the 11 countries that launched the euro in 1999, was made a great deal easier by the existence of the ecu, since this could be used as a basis for establishing these rates,  particularly against external currencies) .

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Monetary Snake

In principle, this is a synonym for fluctuation tunnel.  However, the European monetary snake designated narrower fluctuation limits for the currencies involved inside a wider fluctuation tunnel which fixed the limits of their fluctuations against external currencies.  So, the European snake designates(d)  the limits within which  the currencies participating in the joint European floatation could fluctuate (based on restricted bilateral relationships between participating  currencies), as against* the “tunnel” within which the currencies of the international  monetary system fluctuated against the dollar,  the international currency of reference.

Münzverein (= coin union)

A monetary union  created by the German states in 1857,  following the creation of a  « zollverein  = customs union » en 1834, but before their union into a federal state in 1871.   It was accompanied by the adoption of the gold standard for determining the values of the currencies of Europe.  It preceded the creation, in 1865, of the Latin Unition, a group formed by other European countries  (France,  Switzerland,  Greece, Belgium, ...).

National debt

Total national debt arising from the accumulation of public sector deficits over the years.

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Overdraft

A credit that a bank grants to a client authorizing him to overdraw his account for an agreed amount of period of time.

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Parity

Official value of the currency of a country in relation to a reference base. In the EMS, the parity of EU currencies is defined in relation to the ecu. In current practice, this term also means “exchange rate”, although the latter fluctuates in accordance with market forces.

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Pivotal rate

Also central rate: usually midway between the selling and buying rates*.

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Prejudicial Question

This is an issue where a court, where cannot pass a judgment, but on which it should postpone its judgment, until it has been judged within another jurisdiction.  The European Court of Justice cannot consider cases until all the matter has been considered by all relevant national institutions.

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Protectionism

Commercial policy that gives preference to national goods and services over imports, and achieved through customs tariffs or other administrative barriers.

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Public sector deficit

Difference between public receipts and expenditure. Generally expressed as a % of GDP.

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Purchasing Power Parity

This term refers to the rate of exchange which equalises the purchasing power in two countries.  Comodities in the first country, expressed in the local currency, then converted at the parity rate of exchange, will give the same price as the corresponding goods in the second country.

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Qualified majority

Is said of an approval mechanism based on a proportion of countries and of the population. The proportion can vary according to the type of subject voted upon.  Under this system, on can adopt a proposal, if it is approved, for instance by at least ½ or 2/3 of the number of Member States representing at least ½ of the population of the Union.

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Reserve funds

Each bank must maintain at the central bank a sum proportional to deposits received or credits granted. Reserves also comprise gold or foreign currency held by the central bank, in every State to meet foreign payment obligations.

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The Schengen Area

The Shengen convention  envisaged the suppression of identity checking at the borders between signatory countries. A territory without borders was thus created.  This territory is commonly called the Shengen Area, after the town of Shengen in Luxembourg, where the agreement was signed in June 1985.  The countries which form the Shengen Area are (as of 2007) in order of joining: the Federal Republic of Germany, Belgium, France, Luxembourg, the Netherlands, Italy, Spain, Portugal, Greece, Austria, Denmark, Finland, Iceland, Norway, Sweden, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Czech Republic, Slovakia, Slovenia, and Switzerland.

fr.wikipedia.org/wiki/Convention_de_Schengen

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Scriptural money or book-currency

Money which allows transfers between accounts by simple act of signature : credits cards, cheques, or bank payement orders etc. This is money wich is payable in the short-term.

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Seigniorage

Revenue for the issuer of a currency, obtained by the fall of the real value of a currency issued compared to the time it was issued due to inflation.  The aim is to bring about reductions in the intrinsic value of a currency through inflation and so to reduce the onus of a debt at the creditor’s expense. 
  

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Selling rate

Exchange rate which banks sell a currency. Central bank sales to limit currency appreciation are also at this rate.

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Settlement

Payments made to close two reciprocal obligations to the limit of the smaller amount. The English term “clearing” is more often used. The currency obligations of a country are “cleared” by transfers between central banks.

Special Drawing Rights (SDR)

The SDR constitute a reference currency for the International Monetary Fund* .  Created in 1960 to act as a complement to the international reserves of the member states, which till then had been restricted to gold or to the USD.  The SDR were created with a value of  0.888671 grams of gold, which was the same amount as for the USD before 1971.


It should be noted that the European basket currency was created in 1975 with a value equivalent to 1 SDR.  At present the SDR is composed of the USD, EUR, GBP and the JPY.  Its composition is reviewed every five years.

www.imf.org/external/np/exr/facts/fre/sdrf.htm

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Store of value

Accumulating wealth or savings. Can be hoarded (under the mattress) or invested to gain interest (savings accounts). Banks play an important redistributive role, transferring surpluses built up through saving to those able to create wealth via investment projects.

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Structural Adjustment

A radical change in the type of management of a society aimed at reducing the role of the public sector to the benefit of its private counterpart, which is presumed to be more efficient.  They are necessary for States incapable of balancing their public finances and whose debts become excessive. They are recognised as having had a negative social impact in the past inasmuch as they have led to a reduction in public expenditure on social services such as education and health

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Subsidiarity Principle

Initially the « subsidiarity principle » meant that decisions should be taken at the level of maximum effectiveness. Thus, questions of common interest would be decided at European level, while questions at national or regional level would be taken at these levels.

According the European interpretation of this principle, the Community does not act, except when it can act more effectively than the member states, in order to achieve an objective, that is to say, when action by the member states is insufficient, or when the added value of community action is apparent.

The « subsidiarity principle » was introduced into the Maastricht Treaty to limit the action of the Community in areas where there was common competence between the Community and the member states.  In other words, the member states interpreted the concept in a one-sided manner to justify their control over European affairs.

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System of mutual credit

Credit is the exchange of a good, money, for example, against a promise of future payment. Thus credit exists when the benefits of the two parties are dissociated in time . “Time “ is the determinant factor. There is a system of mutual credit, or network between banks which provide credit to each other.

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Tunnel of fluctuation

For the currencies which take part, the tunnel determines limits currencies may fluctuate. Central banks must buy a currency wich is too weak or sell a currency wich is too strong in the foreign exchange markets to maintain the rates within the limits.

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Unit of account

Unit of reference in a transaction between two or more parties. In contrast to money which circulates between the parties, a unit of account does not necessarily possess the means of payment function. It represents the “standard” value of money.

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Value of a currency

Because money is a specific form of asset, it has a value. The value of money is established relative to that of other goods rises: it is represented by a certain purchasing power. If the price of goods rises, it is because the value of money declines: with the same unit of money, one can buy less. The change in the value of a monetary unit is represented in indexes showing price movements, i.e. inflation. The stability of a currency determines its capacity to maintain its value in relation to the price of goods, but also in relation to other currencies.

Face value of a currency : the value indicated on the currency’s notes or coins.    

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