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Foreign Exchange Market
The market in which the world’s currencies are traded
Exchange-rate system
A set of rules governing how much national currencies can appreciate and depreciate in the foreign exchange market
Fixed exchange-rate system
Governments establish a fixed price for their currencies in terms of an external standard, such as gold or another country’s currency
Foreign exchange reserves
Governments hold a stock of other countries’ currencies
Floating-exchange rate system
There are no limits on how much a currency can move in the foreign exchange market
Fixed-but-adjustable exchange-rate system
Currencies are given a fixed exchange rate against some standard, and governments are required to maintain this exchange rate. However, governments can change the fixed price occasionally, under a set of well-defined circumstances
Managed float
Governments intervene in the foreign exchange market to influence their currency’s value against other currencies. There are usually no rules governing when such an intervention will occur, and government don’t commit themselves to maintaining a specific fixed price against other currencies or an external standard
Balance of payments
An accounting device that records all international transactions between a particular country and the rest of the world for a given period
Current account
Records all current (non-financial) transactions between American residents and the rest of the world
Financial account
Registers capital flows between the U.S. and the rest of the world
Capital account
Capital outflows (assets) are registered as negative items and capital inflows (liabilities) are registered as positive items
Balance-of-payments adjustment
When an imbalance arises, the country must bring its payments back into balance. This is the process by which a country does so
Bretton Woods System
Attempted to establish a system of fixed exchange rates in a world in which governments were unwilling to accept the loss of domestic autonomy that such a system required. It provided an explicit code of conduct for international monetary relations and an institutional structured centered on the International Monetary Fund (IMF)
Fundamental disequilibrium
Not defined precisely, but it was generally accepted that it referred to payments imbalances large enough to require inordinately painful domestic adjustment
Exchange restrictions
Government regulations on the use of foreign exchange
Stabilization fund
A credit mechanism consisting of a pool of currencies contributed by member countries
Speculative attacks
Large currency sales sparked by the anticipation of an impending devaluation
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