Learning guides - English
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What is debt deflation?
Debt deflation is a theory based on the principle of the correlation between the debt burden and the price level in a country. Deflation has the effect of significantly reducing the debt burden. Conversely, a price increase leads to an increase in the debt burden. This is the theory put forward by its creator Irving Fisher in 1933. In his opinion, debt deflation explains…
What is deflation?
Deflation is a measure of the general decline in the price of goods and services within a country or geographical area. Before you can talk about deflation, there needs to have been recorded declines in prices over a period of at least 3 consecutive quarters. If the decrease occurs over a shorter period, we talk about negative inflation (or of a negative inflation rate).…
What is disinflation?
Disinflation is a decrease in the inflation rate over a given period of time. It should not be confused with deflation which is a general decrease in prices. During periods of disinflation, prices continue to rise, but at a slower pace than in the previous period. The inflation rate remains positive. Households continue to lose purchasing power.
If in France, for…
What is negative inflation?
Negativeinflation is a general price decrease that is not sustainable. This is a temporary decrease that is part of a general trend of rising prices. It is important to distinguish between negative inflation and deflation. The term deflation can only be used if the decline occurs over 3 consecutive quarters, so the general price trend is downward.
What are the…
What is demand inflation?
Demand inflation is a general and sustained increase in prices due to demand that is too high in relation to supply. The lack of products and services then automatically leads to inflation. The larger the imbalance, the higher the demand inflation. This price increase may occur over several months or years before supply increases to meet demand, thereby stopping…
What is core inflation?
Inflation is a measure of the level of general price increase that does not take into account certain expenditure items in the calculation. The objective is to have a seasonally adjusted approach that is not impacted by the State's policy.
Inflation rates exclude the most volatile elements such as oil or food products (dairy products, meat, etc.). These elements are…
What is hyperinflation?
Hyperinflation, also known as galloping inflation, is an economic situation where there is an extreme rise in the inflation rate within a geographical area.We're talking about inflation of at least 50% per month, according to Phillip Cagan's commonly accepted definition.However, according to the European Union accounting standard, hyperinflation is defined as cumulative…
What is stagflation?
Stagflation is an economic expression for a period with weak or no growth and strong inflation. For stagflation to occur, the price increase and economic slowdown must be sustainable.
Causes and consequences of stagflation
Stagflation can occur following a major economic crisis. To boost growth, the central bank then applies an expansionary monetary policy. It then…
What is imported inflation?
Imported inflation is a general and sustainable price increase due to an increase in costs of imported products. This price increase concerns the price of raw materials and all imported products or services used by companies in a country. Imported inflation is also referred to as cost inflation.
What causes imported inflation?
Imported inflation is caused by a…
What is inflation?
Inflation is a measure of the general increase in the prices of goods and services in a country or geographical area. The higher the inflation, the more the currency loses value. This is therefore a loss of purchasing power for all economic actors (households, companies, the country, etc.). In times of inflation, you need more money (at the inflation rate) to purchase your…
On the Forex market, inflation is an economic indicator that is highly monitored by traders. The inflation rate is one of the most important determinants of exchange rate developments even if other elements are taken into account.
Definition of inflation
Before addressing the mechanism that links exchange rates and inflation in Forex, it is important to define inflation and where it comes…
Definition of actual inflation and perceived inflation
Actual inflation is the rate of inflation measured by the consumer price index. Perceived inflation is the rate of inflation measured by a household opinion survey. The latter has no legitimacy from an economic point of view, it is a simple feeling. There is often a wide gap between actual and perceived inflation. Is the gap between the two…
What is conventional monetary policy?
Conventional monetary policy is a set ofinstruments available to a central bank to control the money supply level. These include instruments that have been used by all central banks since their inception.
Conventional monetary policy is structured around 3 axes: open market operations, standing facilities and minimum reserves.
Conventional monetary…
What is an expansive monetary policy?
An expansive monetary policy is activity by the central bank to stimulate economic activity in a country or geographical area. This type of policy is adopted in times of economic recession or early recovery. The effect of expansive monetary policy is to increase the money supply.
Expansive monetary policy instruments
The main instrument of an…
What is unconventional monetary policy?
Unconventional monetary policy is a set of measures taken by a central bank to bring an end to an exceptional economic situation. Central banks use these measures only if conventional monetary policy instruments (policy rates, minimum reserves, open market operations) fail to achieve the desired effect.
Why use unconventional monetary…
What is a restrictive monetary policy?
A restrictive monetary policy is a set of central bank measures aimed at combating an inflation rate that is too high. The objective is therefore to stop devaluation of the currency on the foreign exchange market and restore economic agents’ confidence in this currency. A restrictive monetary policy is adopted in times of strong economic growth, in times…
What is monetary policy?
Monetary policy is the action taken by a central bank to influence the money supply level of a country or geographical area. In the European Union, the ECB (European Central Bank) is in charge of monetary policy. In the United States, it is the FED.
Monetary policy can influence several elements:
- The price level of goods and services (inflation rate)
- Its…
What is a policy rate?
A policy rate is a short-term reference rate set by a central bank. In reality, there are three different policy rates.
The main one, and the one that everyone talks about in the press, is the refinancing rate. It is the rate at which commercial banks can borrow money from their central bank.
The other 2 key rates are less in the spotlight but are just as important.…
What is a liquidity trap?
A liquidity trap is an economic situation in which the central bank is unable to generate inflation despite monetary stimulus. A liquidity trap marks the failure of conventional monetary policy (open market operations, standing facilities, minimum reserves).
A liquidity trap often follows a major economic crisis. The central bank then lowers its key rates to zero,…
Unlike the FED’s monetary policy, we are going to study the FED’s fiscal policy in a generic way, as its effects are mechanically comparable regardless of the legislation.
The budget can only be presented in three forms:
- a balanced budget
- a deficit budget
- a surplus budget
We are going to look at the consequences of these different presentations on the economy and therefore…
What is fiduciary money?
Fiduciary money, or currency, refers to banknotes and coins in circulation in the economy. This is the liquidity available to economic actors to carry out transactions. It is a means of payment. Currency is tangible property, unlike scriptural money which is immaterial.
The first coin was minted in 650 BC by King Aliatte II. The objective then, was to avoid having…
What is scriptural money?
Scriptural or book money is the money available on the current accounts of households and businesses. It is a simple accounting entry made by a financial institution (usually a bank). Scriptural money is therefore intangible, unlike fiduciary money (bank notes and coins). However, it can be converted into liquidity at any time. If an economic agent (household or…
What is money creation?
Money creation is the process leading to an increase in the money supply. This money supply can be divided into 2 main categories:
- currency: This is notes and coins in circulation within a country or geographical area. It represents about 5% of the world's money supply.
- book money: This is money in the form of accounting entries. It represents 95% of the…
What is QE?
Quantitative Easing (QE) is monetary easing, organized by a central bank, to stimulate economic activity within a country. It is an unconventional measure causing an increase in the money supply.
Why does a central bank decide to launch quantitative easing?
A central bank can use the policy rate to increase the money supply. By lowering its policy rate, it encourages…
Policy rates are one of the main tools of central banks’ monetary policy. They have a big impact on financial markets and the economy. There are also major movements in Forex and global stock markets every time a central bank (ECB, BoJ, BoE, FED, etc.) decides to change them. It should be noted that central banks don’t have one but have several policy rates. The one they impart is the main…
A country's monetary policy is driven by central banks. The best known (ECB, FED, BoJ and BoE) are independent, but some are directly linked to the government as is the case in China. There are three monetary policy instruments:
- Open market operations, which consist in acting on the money supply in circulation as well as on financial assets
- Standing facilities corresponding to the…
Definition of the money supply
The money supply is the volume of money in circulation at a given time T. It is the monetary authorities (central banks) that determine how much this volume should grow. The money supply is therefore derived from monetary policy. Aggregates are used to measure the money supply.
Monetary aggregate: Unit of measurement for the money supply
Let us define what…
As important as it is to understand economic activity indicators, it would be useless if this knowledge were not used to anticipate monetary policy actions and more particularly the actions of the FED. Very often financial markets interpret data that indicates a change in the economy, but don’t react much because they believe that, whatever changes are made to the economy, they will not lead to…
