Global Finance and Monetary Relations

Introduction

Global finance concerns the movement and management of financial resources across national borders. It includes international banking, capital flows, foreign exchange, sovereign debt, investment and global financial institutions.

International monetary relations concern currencies, exchange rates, reserve assets and cooperation among monetary authorities.

Core Concepts

Global Finance: Cross-border financial activity involving capital, credit, investment, banking and financial markets.

International Finance: Financial transactions and relationships involving more than one country.

International Monetary System: The framework governing international currencies, exchange rates, payments and monetary cooperation.

Capital: Financial resources used for investment or economic activity.

Capital Flow: Movement of capital across national borders.

Exchange Rates

Exchange Rate: The price of one currency expressed in terms of another currency.

Fixed Exchange Rate: An exchange-rate system in which a currency is maintained at or around a specified value.

Floating Exchange Rate: An exchange-rate system in which the currency’s value is primarily determined by market forces.

Managed Float: An exchange-rate system in which market forces operate but monetary authorities may intervene.

Currency Appreciation: Increase in the value of a currency relative to another currency.

Currency Depreciation: Decrease in the value of a currency relative to another currency.

Currency Devaluation: Official reduction in the value of a currency under a fixed or managed exchange-rate system.

Foreign Exchange

Foreign Exchange Market: Global market where currencies are bought and sold.

Foreign Exchange Reserves: Foreign-currency assets held by a central bank or monetary authority.

Reserve Currency: A currency widely held by central banks and governments as part of their international reserves.

Hard Currency: A currency generally regarded as relatively stable and widely accepted in international transactions.

International Monetary Institutions

International Monetary Fund: Institution promoting international monetary cooperation and providing financial assistance to member countries.

Bank for International Settlements: Institution supporting cooperation among central banks and monetary authorities.

Central Bank: National monetary authority responsible for functions such as monetary policy and, often, financial stability.

Monetary Policy

Monetary Policy: Actions taken by a central bank or monetary authority to influence money, credit, interest rates and economic conditions.

Interest Rate: The cost of borrowing or return on lending.

Policy Rate: A key interest rate set or influenced by a central bank to guide monetary conditions.

Inflation: Sustained increase in the general price level of goods and services.

Deflation: Sustained decline in the general price level.

Balance of Payments

Balance of Payments: A systematic record of a country’s economic transactions with the rest of the world.

It generally includes:

• Current account
• Capital account
• Financial account

Current Account: Records transactions involving goods, services, primary income and secondary income.

Capital Account: Records certain capital transfers and transactions in non-produced, non-financial assets.

Financial Account: Records transactions involving financial assets and liabilities.

Capital Flows

Foreign Direct Investment: Cross-border investment involving a lasting interest and significant influence in an enterprise.

Portfolio Investment: Cross-border investment in financial assets without the degree of control normally associated with FDI.

Short-Term Capital Flow: Capital movement involving relatively short investment horizons.

Long-Term Capital Flow: Capital movement involving longer-term investments or financing.

Capital Flight: Large-scale movement of capital out of a country, often associated with concerns about economic or political conditions.

Sovereign Debt and International Finance

Sovereign Debt: Debt issued or owed by a national government.

External Debt: Debt owed to foreign creditors.

Debt Service: Payments of principal and interest.

Debt Sustainability: Ability to meet debt obligations without unsustainable economic or fiscal adjustment.

Sovereign Default: Failure by a government to meet its debt obligations according to agreed terms.

Debt Restructuring: Modification of debt terms to facilitate repayment or reduce financial pressure.

Financial Crises

Financial Crisis: Severe disruption of financial markets or institutions.

Currency Crisis: Rapid loss of confidence in a currency.

Banking Crisis: Serious disruption affecting banks and the financial system.

Sovereign Debt Crisis: A crisis involving a government’s inability or difficulty in servicing sovereign debt.

Contagion: Transmission of financial or economic distress from one country or market to others.

Global Financial Governance

Global Financial Governance: International rules, institutions and arrangements governing global finance.

Important institutions include:

• IMF
• World Bank Group
• Bank for International Settlements
• Financial Stability Board
• Regional development banks
• Central banks and monetary authorities

Financial Stability Board: International body coordinating financial stability standards and cooperation among national financial authorities.

Financial Regulation

Financial Regulation: Rules governing financial institutions and markets.

Capital Adequacy: Requirement that financial institutions maintain sufficient capital relative to their risks.

Systemically Important Financial Institution: A financial institution whose failure could significantly disrupt the wider financial system.

Macroprudential Policy: Policies designed to reduce systemic risks across the financial system.

Monetary Sovereignty

Monetary Sovereignty: A state’s authority to manage its currency and monetary policy.

Dollarization: Adoption of a foreign currency, commonly the US dollar, as legal tender or a major component of the monetary system.

Currency Union: Arrangement in which multiple countries share a common currency.

Monetary Union: Broader integration involving a common monetary policy and, usually, a common currency.

Key Distinctions

Appreciation vs Depreciation: Appreciation is an increase in currency value; depreciation is a decrease.

Devaluation vs Depreciation: Devaluation is an official reduction under a fixed or managed system; depreciation generally refers to market-driven decline.

FDI vs Portfolio Investment: FDI involves lasting interest and significant influence; portfolio investment generally does not.

Current Account vs Financial Account: The current account records trade and income-related transactions; the financial account records transactions in financial assets and liabilities.

Monetary Policy vs Fiscal Policy: Monetary policy concerns money, credit and interest rates; fiscal policy concerns government revenue, spending and borrowing.

Key Terms at a Glance

Global Finance | International Finance | International Monetary System | Capital Flow | Exchange Rate | Fixed Exchange Rate | Floating Exchange Rate | Managed Float | Appreciation | Depreciation | Devaluation | Foreign Exchange Market | Foreign Exchange Reserves | Reserve Currency | Monetary Policy | Inflation | Deflation | Balance of Payments | Current Account | Financial Account | FDI | Portfolio Investment | Capital Flight | Sovereign Debt | Debt Sustainability | Sovereign Default | Debt Restructuring | Financial Crisis | Contagion | Financial Stability Board | Monetary Sovereignty | Dollarization | Currency Union

Related Glossaries

IMF and World Bank | International Political Economy | Foreign Investment | Development Finance | International Trade | Economic Statecraft