| automatic adjustment mechanisms | Mechanisms that automatically act to eliminate balance-of-payments problems.
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| balance-of-payments deficit | Occurs when more money is leaving the country than is
entering it.
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| classical adjustment process | Process by which the economy automatically moves towards internal and external balance.
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| crawling peg | Exchange rate policy; exchange rate is devalued at a rate roughly equal to the inflation differential between a country and its trading partners.
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| currency board | The requirement that a specific amount of foreign currency must back up each unit of domestic currency that is printed.
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| devaluation | Decrease in the value of the domestic currency relative to the currencies of other countries; used when exchange rates are fixed.
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| dollarization | Replacement of a domestic currency with another country's currency for example, the U.S. dollar.
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| domestic credit | The monetary authority's holdings of claims on the public sector—government debt—and on the private sector—usually loans to banks.
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| domestic credit ceiling | A limit on domestic credit expansion, often suggested by the
IMF as part of a stabilization plan.
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| exchange rate overshooting | Movement of the exchange rate past its target. Adjustment
of exchange rates toward long-run equilibrium is frequently accompanied by a move, in the medium run, of the exchange rate past its final position.
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| expenditure-reducing (-increasing) policies | Policies aimed at offsetting the effects of expenditure-switching policy.
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| expenditure-switching policies | Policies aimed at increasing purchases of domestic
goods and decreasing purchases of imported goods.
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| external balance | Occurs when the balance of payments is neither in surplus nor in deficit; when the current account and the capital account exactly offset each other.
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| foreign exchange market intervention | The sale/purchase of currency in foreign
exchange markets for the express purpose of increasing or decreasing the value of the domestic currency. Carried out by a country's central bank.
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| hysteresis | Occurs when temporary fluctuations in one variable have permanent effects on another. See also unemployment hysteresis.
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| internal balance | Occurs when output equals potential output.
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| International Monetary Fund (IMF) | International organization created to promote international
monetary cooperation; makes its resources temporarily available, under stringent conditions, to member countries experiencing balance-of-payments problems.
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| J-curve effect | Observation that when a currency depreciates, the value of net exports rises temporarily, and then falls.
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| monetary approach to the balance of payments | Emphasizes monetary causes of balance-of-payments problems.
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| neutrality of money | Proposition that equiproportional changes in the money stock and prices leave the economy unaffected.
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| nonsterilized intervention | Occurs when the central bank does not use monetary
policy to offset the effect of foreign exchange market intervention on the domestic money supply. Contrast sterilized intervention.
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| purchasing power parity (PPP) | Theory of exchange rate determination arguing that
the exchange rate adjusts to maintain equal purchasing power of foreign and domestic currency.
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| real devaluation | A decline in the purchasing power of the dollar relative to other currencies.
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| self-fulfilling expectation | Expectations that cause a variable to change in the expected
manner; if enough people expect a currency to depreciate, capital flows generated by their expectations will cause it to do so.
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| speculative bubble | Occurs when the value of a variable departs from the level that the factors that determine its value suggest; when people argue that a stock is over- or undervalued, they are suggesting that such a bubble exists.
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| spillover (interdependence) effects | Occur when policy changes or supply/demand shocks in one country affect output in another.
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| sterilization | Open market purchase or sale by the Fed in order to offset effects of foreign exchange market intervention on the monetary base.
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| sterilized intervention | Occurs when the central bank uses monetary policy to offset
the effect of foreign exchange market intervention on the domestic money supply.
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| sticky real wages | See wage stickiness.
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| target zones | A specified range to which central banks limit exchange rate fluctuations.
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| tariff | A tax imposed on imported goods.
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| wage-price spiral | A process in which changes in prices feed back into wages, and from there again into prices.
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| World Trade Organization (WTO) | International organization that works out rules of trade between its member nations; created January 1, 1995, as a result of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT).
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