Chapter 7: The International Monetary System and the Balance of Payments

Jamaica Agreement

Agreement (1976) among IMF members to formalize the existing system of floating exchange rates as the new international monetary system

Crawling Pegs

Allowing the peg to change gradually over time.

Special Drawing Rights

Can be used to settle official transactions at the IMF as a means of injecting more liquidity into the international monetary system while reducing the demands placed on the dollar as a reserve currency.

International Finance Corporation

Charged with promoting the development of the private sector in developing countries.

Convertible Currencies

Currencies that could be freely exchanged for other currencies without legal restrictions.

European Monetary System

EU system designed to create a zone of monetary stability in Europe, control inflation, and coordinate exchange rate policies of EU countries.

World Bank

Established in 1945, initial goal was to help finance reconstruction of the war-torn European economies. Then adopted a new mission to build the economies of the world's developing countries.

International Monetary System

Establishes the rules by which countries value and exchange their currencies.

Managed Float

Exchange rates are not determined purely by private sector market forces.

Short-term Foreign Portfolio Investments

Financial instruments with maturities of one year or less.

Brady Plan

Focused on the need to reduce the debts of the troubled countries by writing off parts of the debts or by providing the countries with funds to buy back their loan notes at below face value.

Unilateral Transfers

Gifts between residents of one country and another.

International Development Association

extends loans at low interest rates to poor nations that cannot qualify for loans from the World Bank

Sterling-based Gold Standard

gold standard in which the British pound is commonly used as an alternative means of settlement of transactions

Export of the Services of Capital

income that a country's residents earn from their foreign investments (Germany)

Pegged

linked to a single strong currency

Gold Standard

A monetary system in which paper money and coins are equal to the value of a certain amount of gold.

Triffin Paradox

A problem in which a national currency that is also a reserve currency will eventually run a deficit, leading to lack of confidence in the reserve currency and a financial crisis.

International Monetary Fund

An international organization of 183 countries, established in 1947 with the goal of promoting cooperation and exchange between nations, and to aid the growth of international trade.

Regional Development Banks

Banks whose mission is to promote economic development of poorer nations within the region they serve.

Soft Loans

Loans that bear some significant risk of no being repaid.

Hard Loan Policy

May make a loan only if there is a reasonable expectation that the loan will be repaid.

Current Account Balance

Measures the net balance resulting from merchandise trade, service trade, investment income, and unilateral transfers.

Smithsonian Conference

Meeting held in Washington, DC, in December 1971, during which central bank representatives from the Group of Ten agreed to restore the fixed exchange rate system but with restructured rates of exchange between the major trading currencies.

Flight Capital

Money sent abroad by foreign residents seeking a safe haven for their assets, hidden from the sticky fingers of their home governments.

International Bank for Reconstruction and Development

Official name of the World Bank.

Par Value

Official price in terms of gold.

Exchange Rate Mechanism

Participants pledged to maintain fixed exchange rates among their currencies within a narrow range of 2.25 percent of par value and a floating rate against the U.S. dollar and other currencies.

Adjustable Peg

Pegs themselves could be altered under certain conditions.

Exchange Rate

Price of one currency in terms of a second currency.

International Centre for Settlement of Investment Disputes

Provides arbitration services when disputes arise between foreign investors and sovereign states.

Capital Account

Records capital transactions between residents of one country and those of other countries.

Balance of Payments (BOP) Accounting System

Records international transactions and supplies vital information about the health of a national economy and likely changes in its fiscal and monetary policies.

Official Settlements Balance

Reflects changes in a country's official reserves; essentially, it records the net impact of the central bank's interventions in the foreign-exchange market in support of the local currency.

Louvre Accord

Signaled the commitment of these five countries to stabilizing the dollar's value.

Long-term Foreign Portfolio Investments

Stocks, bonds, and other financial instruments issues by private and public organizations that have maturities greater than one year and that are held for purposes other than control.

Baker Plan

Stressed the importance of debt rescheduling, tight IMF-imposed controls over domestic monetary and fiscal policies, and continued lending to debtor countries in hopes that economic growth would allow them to repay their creditors.

Flexible Exchange Rate System

Supply and demand for a currency determine its price in the world market.

Merchandise import

Tangible product purchased from abroad

Merchandise Export

Tangible product sold abroad

World Bank Group

The International Development Association, The International Finance Corporation, The Multilateral Investment Guarantee Agency, and the International Centre for Settlement of Investment Disputes.

Balance on Merchandise Trade

The difference between a country's exports and imports of goods.

Balance on Services Trade

The difference between a country's exports of services and its imports of services.

Float

The pound's value would be determined by the forces of supply and demand and the Bank of England would no longer redeem British paper currency for gold at par value.

Fixed Exchange Rate System

The price of a given currency does not change relative to each other currency.

Service Import

The purchase by a resident of a service from another country.

Service Export

The sale of a service to a resident of another country.

Multilateral Investment Guarantee Agency

World Bank affiliate that offers political risk insurance to investors in developing countries.

Plaza Accord

agreement made in 1985 among central bankers to allow the U.S. dollar to fall in value.

IMF Conditionality

an agreement to loan IMF funds on the condition that certain government policies are adopted.

Import of the Services of Capital

payments that a country's residents make on capital supplied by foreigners

Beggar-thy-neighbor Policies

the attempt to promote trade surpluses through policies that cause other states to suffer trade deficits