Essential Glossary of Financial and Economic Terms

Acyclical

Describes an economic variable that is neither procyclical nor countercyclical. The correlation coefficient is close to 0.

Amplification of Business Cycles

It means that the size of the shock is smaller than the impact of the shock on total output. The actual response of the economy is bigger than the shock itself.

Amplification

It refers to the strong fluctuations in output generated by changes in interest rates, phenomena that the interest rate channel cannot explain. Adverse and positive shocks to the economy may be amplified by worsening financial conditions.

Amplitude

It is a measure of the change of a periodic variable over a single period. It represents the maximum deviation from trend in an economic time series.

Anticipated Inflation Effect

Anticipated inflation occurs at full employment with real GDP equal to potential GDP. It implies two costs: transaction costs and higher uncertainty.

Asset Fire-Sale

A situation in which a bank gets into trouble and starts selling liquid assets in a hurry to pay off depositors or lenders. This situation places downward pressure on the prices of these assets. Modern banking regulations have required banks to “mark their tradable assets to market” as much as possible.

Automatic Stabilizers

Economic policies and programs that are designed to offset fluctuations in a nation’s economic activity without intervention by the government or policymakers. The best-known automatic stabilizers are corporate and personal taxes, and transfer systems such as unemployment insurance and welfare.

Bad Bank

Institutions that acquired the bad, very risky assets from institutions in trouble and managed them. These assets were very valuable in accounting terms, but their market value was very low.

Bail-In

It refers to the creditors of the company accepting that they are going to receive less than what they had invested in the bank in trouble. It is another way of supervising the bank, apart from the supervising institution. In many cases, bailouts were done by taxpayers, and this is an awful incentive for banks (moral hazard). It imposes some discipline so that the managers of the bank behave appropriately since if creditors are aware of the losses, they are going to put pressure on the bank’s CEOs. “Creditors” here refers to investors, not common creditors like suppliers of raw materials. Both bail-ins and bail-outs are designed to keep the borrowing institution afloat, but they accomplish the goal very differently. Bail-outs are designed to keep creditors happy and interest rates low, whereas bail-ins are ideal in situations where bail-outs are politically difficult and creditors are not keen on the idea of a liquidation event.

Balance Sheet Channel

It is a channel which causes monetary policy to not have effects on the economy. When a monetary policy is used, it serves to restructure the balance sheets of the banks, but it doesn’t achieve the desired effects of the policy.

Bank Capital

The difference between the value of a bank’s assets and its liabilities. It measures how much would be left if the bank had to sell off assets to pay off all its liabilities today.

Bank Leverage

The extent to which a business funds its assets with borrowings rather than equity. More debt relative to each dollar of equity means a higher level of leverage.

Bank Resolution

A process in which, before the bank actually publishes a report admitting to being insolvent, regulators seize the bank and use the assets to pay off its creditors (i.e., the people it owes money to). If these assets don’t cover the value of the deposits, then the deposit insurance fund compensates the depositors.

It implies providing a procedure for who gets the money first, knowing that at some point some people won’t get the money. In this procedure, regulators seize the bank and use the assets to pay off its creditors.

Bank Run

A situation in which depositors line up to demand their money back because they suspect a bank is insolvent. It is not necessary that a bank is really in trouble; just a rumor is enough to make it happen. Depositors will run to the bank to withdraw their funds “just in case”. This massive behavior, in that particular bank, can lead the bank into default.

Banking Panic

A situation that happens when a bank run is generalized to the financial system. Thus, the whole financial system is in trouble, and then systemic risk appears.

Boom

It can be defined in two ways: 1. Excessive and fast growth of an economic or financial activity in a short period of time. 2. A series of positive deviations from trend in real GDP, culminating in a peak, which is the last month before some key indicators start falling.

Bottom-Up Analysis

Bottom-up research is all about the numbers. The state of the economy is not considered; the idea behind it is that a great entity can make money in any market environment. It tests the worst-case scenario (stress tests).

Bridge Institutions

Banks authorized to hold the assets and liabilities of another bank, specifically an insolvent bank. It is in charge of continuing the operations of the insolvent bank until the bank becomes solvent through acquisition by another entity or through liquidation.

Broad Credit Channel

Arises from an asymmetry of information between borrowers and lenders, which induces a premium in the cost of all forms of external finance over the cost of internal funds.

Business Cycle

Short-run ups and downs, or booms and recessions, expansions and contractions in aggregate economic activity. Also, fluctuations about trend in real GDP. This sequence of changes is recurrent but not periodic, meaning that as they are not periodic, we do not know when they are going to happen.

Capital Adequacy Rules

Requirements set in Basel Accords in order to discourage banks from taking excessive risks and so prevent deposit insurance being called on. The idea of these rules is to ensure that banks have enough room to absorb losses when things go wrong, so that the claims of depositors and senior bond-holders can still be honored.

Central Bank Independence

It refers to the freedom of monetary policymakers from direct political or governmental influence in the conduct of policy. To solve time-inconsistency problems, one solution is to delegate policy to an independent authority with different preferences or incentives.

Classical Dichotomy

It refers to an idea attributed to classical and pre-Keynesian economics that real and nominal variables can be analyzed separately. A situation in an economic model where real variables are determined by real factors, and the money supply determines only the price level.

Coincident Variables

Those which react at the same time as the cycle (GDP); i.e., if GDP increases, they increase in the same period.

Collateralized Debt Obligations (CDOs)

It is a structured financial product created by bundling a pool of similar loans into a single investment that can be bought or sold and that repackages this asset pool into discrete tranches.

Comisión Nacional del Mercado de Valores (CNMV)

It is the organism responsible for the supervision and inspection of Spanish securities markets and the activity of those involved in them. Its goal is to ensure the transparency of Spanish securities markets, correct price formation, and the protection of investors.

Competitive Devaluation

A series of sudden currency depreciations that nations may resort to in tit-for-tat moves to gain an edge in international export markets. Competitive devaluation refers to a scenario in which abrupt national currency devaluation by one nation is matched by a currency devaluation of another, especially if they both have managed exchange-rate regimes rather than floating exchange rates determined by market forces.

Competitive Equilibrium

Equilibrium in which firms and households are assumed to be price-takers, and market prices are such that the quantity supplied equals the quantity demanded in each market in the economy. A state of economy where prices and quantities are such that the behavior of price-taking consumers and firms is consistent.

Countercyclical

Describes an economic variable that tends to be below (above) trend when real GDP is above (below) trend. The correlation coefficient is negative and significant.

Credit Crunch

It is a financial phenomenon consisting in reducing the money available to lend or a sudden increase in the cost of bank loans. Consequences: limiting the possibilities of borrowing for consumers, which implies a reduction of consumption and investment for entrepreneurs, limiting economic growth.

Credit Default Swaps (CDSs)

It is a particular type of swap designed to transfer the credit exposure of fixed income products between two or more parties. In a credit default swap, the buyer of the swap makes payments to the swap’s seller up until the maturity date of a contract.

Credit Rationing

An action taken by lending institutions to limit or deny credit based on borrowers’ creditworthiness and an overload of loan demands. Interest rates trending either up or down can lead to credit rationing. An example of credit rationing is raising interest rates above current market rates.

Credit View

Defended by Mishkin and Bernanke. Different from what the money view supports, this approach establishes that the financial structure matters and only money cannot really explain the business cycle.

Crisis Management Mechanism

They are rules created to manage the bankruptcy processes of banks. The idea is to check the insolvency of the banks before the problems have arisen to the balance sheet to help end up with the bank or even create another bank with the good assets of the one in bankruptcy.

Crowd Lending

Forms of financing that are characterized by the absence of financial intermediaries: donations, sponsorship, pre-selling, investing in equity and loans. In all, the applicant fund uses an Internet portal to appeal to the widest possible audience and through small individual contributions, getting attract funding.

Crowdfunding

The practice of funding a project by raising money from a large pool of people. Financing can take the form of donations, loans, or money in exchange for equity. Crowdfunding is typically done through internet-based platforms.

Cyclical Buffer (Basel III)

It aims to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth that have often been associated with the buildup of system-wide risk. The purpose of this regulation is to start getting ready for bad times during the good times. This requirement establishes a range from 0 to 2.5% for common equity in good times in order to react quickly and absorb losses as soon as possible.

Cyclical Deficit

It is a deficit that is related to the business or economic cycle. It is the deficit experienced at the low point of this cycle when there are lower levels of business activity and higher levels of unemployment.

Cyclically-Adjusted Deficit

It is a projection of the government’s budget deficit assuming the economy is at a normal level of activity. This is done by presupposing that consumer spending and taxes remain unchanged; however, it does not take into account the effect of the change in national income to costs of government debt or that the budget deficit itself is a government policy.

Debt Deflation

A theory behind economic cycles that holds that recessions and depressions are due to a severe real indebtedness of the productive sector that has cumulative effect. It is said to arise cumulative effect due to firms highly leveraged and that are affected by any small shock, it can drive the firm to bankruptcies causing a decrease in investment, and thus, in demand for intermediate goods and finally, in prices.

Debt Restructuring

It is a process that allows a private or public company, or a sovereign entity facing cash flow problems and financial distress to reduce and renegotiate its delinquent debts in order to improve or restore liquidity so that it can continue its operations.

Deposit Insurance

It is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank’s inability to pay its debts when due. It promotes financial stability.

ECB’s Economic Analysis

The economic analysis tries to analyze the short- to medium-term determinants of price developments. The focus is on real activity and financial conditions. This analysis takes into account that price developments are influenced by the interplay of supply and demand in the good market.

ECB’s Monetary Analysis

It is an analysis of monetary trends. Monetary analysis consists of a detailed analysis of monetary and credit developments with a view to assessing their implications for future inflation and economic growth.

Emergency Liquidity Assistance (ELA)

As its name implies, ELA is an exception to the rule. The rule is that the 19 national central banks in the Eurozone, which implement the ECB’s monetary policy, provide liquidity to banks at interest rates set by the council, provided that the banks post eligible collateral, such as government bonds with acceptable credit ratings.

Equity Multiplier

A measurement of a company’s financial leverage. Companies finance the purchase of assets either through equity or debt, so a high equity multiplier indicates that a larger portion of asset financing is being done through debt than equity. The multiplier is a variation of the debt ratio. Equity multiplier = .

Euler Equation

u’c1/u’c2=1+R. It is a first-order condition that is a relation between a variable that has different values in different periods or different states.

European Banking Authority

It is an independent EU Authority which works to ensure effective and consistent prudential regulation and supervision across the European banking sector. Its overall objectives are to maintain financial stability in the EU and to safeguard the integrity, efficiency and orderly functioning of the banking sector.

European Financial Stability Facility (EFSF)

It was created as a temporary crisis resolution mechanism by the Euro area Member States in June 2010. It has provided financial assistance to Ireland, Portugal and Greece.

European Insurance and Occupational Pensions Authority (EIOPA)

It is part of the European System of Financial Supervision. Its responsibilities are to support the stability of the financial system, transparency of markets and financial products as well as the protection of insurance policyholders, pension scheme members and beneficiaries.

European Securities and Markets Authority (ESMA)

It is a European Union financial regulatory institution and European Supervisory Authority. It works in the field of securities legislation and regulation to improve the functioning of financial markets in Europe, strengthening investor protection and cooperation between national competent authorities.

European Stability Mechanism (ESM)

It is the permanent crisis resolution mechanism for the countries of the Euro area. The ESM issues debt instruments in order to finance loans and other forms of financial assistance to Euro area Member States. It is currently the sole mechanism for responding to new requests for financial assistance by Euro area Member States. It has provided loans to Spain and Cyprus.

European-Wide Deposit Guarantee Scheme

The Deposit Guarantee Schemes reimburse a limited amount (100,000€) of deposits to depositors whose bank has failed. From the depositors’ point of view, this protects a part of their wealth from bank failures.

Excessive Deficit Procedure

The EDP is a rules-based process established in the Treaty on the Functioning of the European Union to ensure that Member States correct gross fiscal policy errors. There are two key reference values, which, when breached, constitute criteria on the basis of which the opening of an EDP can be warranted: one for the general government deficit (3% of GDP) and one for gross government debt (60% of GDP).

External Finance Premium

The difference between the cost of capital available to firms (retaining earnings) and firms ‘cost of raising capital externally (asking for debt). It has a link with the net worth of potential borrowers.

Federal Deposit Insurance Corporation (FDIC)

It preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000.

Financial Accelerator

A financial theory that states that small change in financial markets can produce a large change in economic conditions and create a feedback loop. This feedback loop is created because of the need of investment from firms that produces an instant relationship between real economy and financial markets; if firms aren’t reliable for borrowing, its economic activity cuts the asset prices down.

Financial Access

It is the ability of individuals and corporates to ask for credit, deposit, insurance. Those people whose living conditions don’t let them access to financial services are recognized as unbanked. It is believed that financial access allows economy to grow.

Financial Depth

It refers to the fact that modern financial systems contain more options than in the past for people to channel their savings towards. It captures the financial sector relative to the economy.

Financial Services Action Plan (FSAP)

It is a key component of the European Union’s attempt to create a single market for financial services. Its aim is the harmonization of the financial services markets within the European Union.

Financial Stability

It refers to a country’s ability to facilitate and enhance economic processes, manage risks, and absorb shocks. We have to see it as occurring along a continuum, rather than as a static condition.

Fiscal Compact

It is a treaty signed by 25 countries members of the UE. It contains a set of rules, called “golden rules” which are links on the EU’s principle of budgetary balance. Formally, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union.

Fiscal Councils

They are institution, funded by but independent of government, which provides public advice on fiscal issues, and more restrictively: institutions that provide macroeconomic advice on the likely course of national budget deficits. They are usually described as independent institutions.

Fiscal Rules

A fiscal rule imposes a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates. Fiscal rules typically aim at correcting distorted incentives and containing pressures to overspend, particularly in good times, so as to ensure fiscal responsibility and debt sustainability.

Fisher Equation

A condition stating that 1+r = (1+R) / (1+i), where r is the real interest rate from the current period to the future period, R is the nominal interest rate from current period to the future period, and i is the rate of inflation between the current period and the future period. The Fisher effect is the increase in the nominal interest rate resulting from an increase in the rate of inflation.

Fondo de Garantía de Depósitos (FGD)

It aims to guarantee deposits in cash and securities or other financial instruments set up in credit institutions, with a limit of 100,000 euros for deposits in cash or, in the case of deposits denominated in another currency, equivalent at the exchange corresponding exchange, and 100,000 euros for investors who have entrusted to a credit institution securities or other financial instruments.

Forward Guidance

It is a tool used by a central bank to exercise its power in monetary policy in order to influence, with their own forecasts, market expectations of future levels of interest rates.

Fractional-Reserve Banking

A banking system in which banks only keep a fraction of the money deposited with them “on reserve” in case people come looking for their money. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Advantage: Saves depositors money: banks can charge interest on their loans and this may save fees on depositors; it makes banks an intermediary between those that have money and those that need to borrow money. Disadvantage: Potential for instability (because rumors or whatever) banks are supposed to have assets greater than liabilities owed to non-investors (i.e. positive bank capital).

Friedman Rule

If the marginal cost of printing money is very low, or we could even assume it is zero, and there are no other distortions in the economy, then the optimal thing to do is to set that nominal interest rate equal to zero. The optimal inflation tax should equal minus the real interest rate, the return on bonds.

FROB

It is a public entity which goal is to manage the restructuring and resolution processes of credit institutions, aimed at ensuring the stability of the financial system.

Global Systemically Important Banks

A G-SIB is defined as a financial institution whose distress or disorderly failure, because of its size, complexity and systemic interconnectedness, could threaten the world’s economy. If any of these institutions get into troubles, for sure there will be banking panic. They are “too big to fail”.

Governance

Establishment of policies, and continuous monitoring of their proper implementation, by the members of the governing body of an organization.

Hedge Funds

Alternative investments using pooled funds that may use a number of different strategies in order to earn active return for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

Herding Behavior

This concept is usually used when one person see others withdrawing their deposits, he will also do the same: spread rumors and fears provoking the bank default. To prevent this, banks need to have enough cash to correspond the withdrawal’s and bankers and government must change these believes and expectations about the bank default in order to stop this situation quickly.

Idiosyncratic Shocks

They are a type of liquidity shocks, which are independently distributed across holders of an asset. It affects individuals and households. In other words, they are specific to the depositor so they are relatively easy to manage.

Inflation Bias

It is the spread between the expected and the real values of the inflation. Traditional theories suggest that inflationary bias will exist when monetary and fiscal policy is discretionary rather than rule based. Others have suggested that the inflationary bias exists even when policy makers do not have the goal of a lower than natural rate of employment, and their policies are based on rules.

Inflation Tax

It is not actual legal tax paid to a government. It refers to the penalty for holding cash at a time of high inflation. When the government prints more money or reduces interest rates, it floods the market with cash, which raises inflation in the long run. If a person is holding cash, though, this cash is worth less after inflation has risen. Then, it is the loss in real wealth associated to inflation.

Interest Rate Channel

It is a mechanism of monetary policy, whereby a policy-induced change in the short-term nominal interest rate by the central bank affects the price level, and subsequently output and employment.

Internal Ratings-Based Approach

Under the Basel II guidelines, banks are allowed to use their own estimated risk parameters for the purpose of calculating regulatory capital.

Lagging Variables

Reacts after the cycle; i.e., if GDP increases in t, they increase in t+1.

Leading Variables

Reacts in advance than the cycle (GDP); i.e., the variable increases in time t and GDP increases in t+1, (if they are procyclical).

Lender of Last Resort

It has the role to offer loans to banks or other eligible institutions that are highly risky to be insolvent. They follow the recommendation set down by Walter Bagehot: lend freely to solvent institutions, against good collateral.

Liquidity Coverage Ratio

It is a liquidity reform proposed in Basel III, designed to ensure that banks can survive for 30 days in a stress scenario when large amounts of funding is being withdrawn. It is designed to ensure that financial institutions have the necessary assets on hand to ride out short-term liquidity disruptions.

Liquidity Effect

It is a term coined by Milton Friedman to describe how expansionary monetary policy affects three elements of the economy: interest rates, income and inflation.

Liquidity Regulations

Ideally, we want banks to avoid problems with either solvency or liquidity, so governments impose solvency and liquidity regulations: 1. Reserve requirements à money that won’t be lend. ( and ) Where R = reserves and D= deposits. 2. Other types of liquidity regulation have operated in the past (they were very relaxed), e.g. Regulations to limit maturity mismatch. 3. New rules to ensure banks have enough liquid assets to withstand substantial withdrawals and to reduce reliance on non-deposit funding but not popular with bankers and have a long phase-in period.

Liquidity Shocks

They are unanticipated changes in the demand for liquidity. We consider two kinds of liquidity shocks: “idiosyncratic liquidity shocks” that are independently distributed across holders of an asset; and “systemic liquidity shocks” that are identically distributed, causing all investors to want to trade identically at the same time.

Liquidity Trap

A situation where the nominal interest rate is zero, and government tries to increase inflation by holding money offering assets and bonds to private sector (banks).

Liquidity

Describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.

Lucas Critique

It is a criticism of econometric policy evaluation procedures that fail to recognize that optimal decision rules of economic agents vary systematically with changes in policy. – the idea that macroeconomic policy analysis can be done in a sensible way only if microeconomic behavior is taken seriously.

Macro-Prudential Regulation

Rules set to maintain stability by encouraging prudence. However, rules put in place to encourage each institution to be prudent can lead to the whole financial system becoming unstable, since following strictly a rule could imply banks stop lending money because they are more worried about meet capital requirements, which can provoke a systemic risk.

Market Discipline

Is an element of Basel Accords. It forms the pillar 3 and it is a disciplinary mechanism that has the potential to reinforce capital regulation and other supervisory efforts to promote safety and soundness in banks and financial systems.

Maturity Mismatch

In the banking world, a mismatch occurs when assets that earn interest do not balance with liabilities upon which interest must be paid. People who supply funds tend to want to have it available for return at shorter terms than people who the bank lends funds out to.

Memorandum of Understanding

It describes a bilateral or multilateral agreement between two or more parties. It expresses a convergence of will between the parties, indicating an intended common line of action.

Menu Cost Models

Sticky price models with explicit costs of changing prices. It takes this name because it is explained as the costs for doing, for example, all the menus of a restaurant again when changing the prices of the food. –It is the cost to a firm resulting from changing its prices.

Micro-Prudential Regulation

The harmonization of this regulation was one of the contribution made on the path of the so called “push strategy” which aim was to support the market by introducing all the system’s institutional and legal pieces, and thereby forcing integrating actions on the part of agents.

Microcredit

They are small quantity loans to lend to poor people or low-income entrepreneurs that are usually lacked of collateral, fix employment or a trustable credit history. It is the most powerful sort of funds in microfinance.

Microfinance

A general term to describe financial services to low-income individuals or to those who do not have access to typical banking services. It is also the idea that low-income individuals are capable of lifting themselves out of poverty if given access to financial services. While some studies indicate that microfinance can play a role in the battle against poverty, it is also recognized that is not always the appropriate method, and that it should never be seen as the only tool for ending poverty.

Monetary Economics

It investigates the link between aggregate real variables – such as real output, real interest rates, employment, and real exchange rate – and nominal variables – such as inflation rate, nominal interest rates, nominal exchange rates and money supply.

Monetary Neutrality

It means that real variables are determined independently of monetary policy; the optimal monetary policy is undetermined; and the role of monetary policy is determining nominal variables.

Monetary Policy Rules

It imposes how the monetary authority should control the money supply in response to variables in the economy that it can observe: money supply targeting and nominal interest rate targeting.

Monetary Policy

Consists of the actions taken by a central bank, currency board or other regulatory committee in order to alter some objective variables (inflation, output, unemployment or nominal exchange rate).

Monetary Transmission Mechanism

It refers to the process by which a central bank’s monetary policy decisions are passed on, through financial markets, to business and households. It describes how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact real variables such as aggregate output and employment.

Money View

The joint research by Milton Friedman and Anna Schwartz from 1948 to 1958 that revolutionized the economics profession’s thinking about the effects and effectiveness of monetary policy.

Mortgage-Backed Securities

It is a type of asset-backed security that is secured by a mortgage, or more commonly a collection (“pool”) of sometimes hundreds of mortgages. The mortgages are sold to a group of.

Mutual Funds

It is a type of professionally managed investment fund that pools money from

Narrative Approach to Monetary Policy

It relies on the reading of the central bank’s documents that provide additional information on policy-makers’ intentions. Hence, the driving force of each policy movement is detected.

Natural Interest Rate

The rate of interest at which the demand for funds and the supply of savings exactly agree.

Nominal Rigidities

It describes a situation in which a nominal variable, such as price or wage, is resistant to change quickly when economic shocks. Complete nominal rigidity occurs when a price is fixed in nominal terms for a relevant period of time. It is also known as price-stickiness or wage-stickiness and it is a fundamental assumption in Keynesian models.

Either prices or nominal wages, or both, do not adjust immediately and completely to economic shocks

Off-Balance-Sheet Operations

An asset or debt that does not appear on a company’s balance sheet. Items that are considered off balance sheet are generally ones in which the company does not have legal claim or responsibility for. From an accounting view point, none of these operations corresponds to a genuine liability or asset for the bank, but only to a random cash flow.

Output Gap

The difference between actual aggregate output and the efficient level or aggregate output.

Primary Deficit

It corresponds to the net borrowing, which is required to meet the expenditure excluding the interest payment.

Procyclical

Describes an economic variable that tends to be above (below) trend when real GDP is above (below) trend. The correlation coefficient is positive and significant.

Propagation

It refers to the time it takes for the real variables to adjust when the short run interest rates have already adjusted; which can’t be explained with the interest rate channel.

Prudential Regulation

Rules to keep institutions solvent. They are requirements to control risk and have enough capital to prevent unexpected losses. The aim of this sort of regulation is to guarantee the stability of the financial system and protect deposits from the banks.

Pull Strategy

A strategy adopted by European authorities to boost gradually the financial integration. Its two main pillars were the Single Market Programme and the creation of the euro.

Quantitative Easing

It is monetary policy used by a central bank to stimulate an economy when standard monetary policy has become ineffective. It is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

Ramsey-Phelps Rule

The Ramsey theory of optimal taxation establishes that the government must levy more taxes on those production factors and goods with more inelastic price- supply or demands, this leads to efficient taxation. Phelps highlighted that an optimal tax plan should include seigniorage.

Rational Expectations

It is a hypothesis which states that agents’ predictions of the future value of economically relevant variables are not systematically wrong in that all errors are random; in our lecture, the individuals make rational expectations about the inflation.

Recapitalization of the Banking Sector

After the bankrupt of Lehmans Brothers, governments around the world put state funds into

banks to recapitalise them, taking shares for the state but usually on generous terms for the banks.

Recession: It is a business cycle contraction; it is a general slowdown in economic activities. Series of negative deviations from trend in real GDP culminating in a trough, which is the last month before some key indicators start growing.

Return on assets (ROA):indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. It is the basic measure of bank profitability. ROA =

Return on equity (ROE):is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. It is expressed as a percentage. In other words, how much the bank is earning on their equity investment. ROE =

Ricardian equivalence:  it states that a change in the timing of taxes by the by the gov. Is neutral. That is, in equilibrium a change in current taxes, exactly offset in PV terms by an equal and opposite change in future taxes, has no effect on the real interest rate or on the consumption of the consumer.

Risk weighted assets:It is a methodology used in the Basel 1 for capital calculation, and bank capital requirements:

Sareb: It is the Spanish Bad Bank which main objectives are: 1. Determining the capital requirements of each bank. 2. A recapitalization or restructuration of the weakest banks. 3. Segregation of the toxic assets in those banks which need a recapitalization.

Seasonal adjustment: is a statistical method for removing the seasonal component of a time series that is used when analyzing non-seasonal trends. Many economic phenomena have seasonal cycles.

Seigniorage: Revenue generated by the government through printing money à difference between the value of money and the cost to produce it – in other words, the economic cost of producing a currency within a given economy or country. If the seigniorage is positive, then the government will make an economic profit; a negative seigniorage will result in an economic loss.

Shadow banking:system of credit intermediation that involves entities and activities outside the regular banking system. Shadow banks are not regulated like banks. It performs important functions in the financial system.

Single resolution fund: It is established by the SRM to pool financial resources for crisis management, to be provided by banks ex-ante, across all participating Member States. According to the case study discussed in class, true banking union will not be achieved without a single resolution fund, possibly linked to a single deposit guarantee scheme, and supported by some kind of solidarity mechanism between countries to provide public resources should this be required.

Single resolution mechanism: It is one of the main pillars of the European Union’s banking union. It will function in conjunction with the other main pillar, the SSM. It applies to banks covered by the SSM.

Single rulebook: It aims to provide a single set of harmonized prudential rules which institutions throughout the EU must respect. This will ensure uniform application of Basel III in all Member States.

Single supervisory mechanism: It is one of the main pillars of the European Union’s banking union. It will function in conjunction with the other main pillar, the SRM.

Solvency regulations:Ideally, we want banks to avoid problems with either solvency or liquidity, so governments impose solvency and liquidity regulations. In this case is Capital Adequacy Regulations:

Solvency:  the ability of a company to meet its long-term financial obligations.

Stabilization policy: Fiscal or monetary policy justified by Keynesian models, which acts to offset shocks of the economy. A macroeconomic strategy enacted by governments and central banks to keep economic growth stable, along with price levels and unemployment. Ongoing stabilization policy includes monitoring the business cycle and adjusting benchmark interest rates to control aggregate demand in the economy.

Structural deficit:  it exists regardless of the point in the business cycle due to an underlying imbalance in government revenues and expenditures. Thus, even at the high point of the business cycle when revenues are high the country’s economy may still be in deficit.

Subordinated bonds: according to the bank resolution, these kind of bonds are ranked behind senior bonds and deposits. Thus, they have a higher risk, but also a higher return in good times. The bond-holders of this sort of debt will only get their money back if there is money left after assets have been sold off to pay off the depositors and senior bond-holders.

Substitution effect: In our lecture, when we talk about substitution effect we refer to the substitution effect on the quantity of leisure. And it is due to an increase in today’s wage. If the firm increases the current wage, the individual is going to devote less time to leisure since this makes it more expensive to have leisure time and he would work more in order to earn a large amount of income thanks to this increment.

Suspension of convertibility:It happens whena bank temporarily suspend withdrawals to stop a run. It is also known as “bank’s holidays” and during that period of time no banks are able to open their doors.

Sustainable debt: In the context of public finance and money, sustainable debt is the one which is able to been paid over time given a growth rate of the economy, the interest rate, and the deficit. It comes from the infinite government budget constraint. In other words, ability of a country to meet its debt obligations without requiring debt relief or accumulating arrears.

Systemic risk: Any risk that may affect the financial system as a whole. The failure of a single firm could cause the failure of the entire financial system.

Tail risk:This concept refers to the approach of Value at Risk, in which given a distribution of “expected losses,” banks are supposed to value their assets at less than their current book value in anticipation of future losses.

Tax‐smoothing: Given that consumers want to smooth its consumption (to keep the same levels of consumption over time), whenever a government expends, it is desirable to finance it with debt instead of with taxes, so you can smooth other thing like intergenerational and intragenerational consumption, and taxes.

Taylor principle: This principle suggests monetary policy should make the interest rate move in the same direction and by a greater amount than observed movements in inflation. The Taylor rule stipulates that for each one-percent increase in inflation, the central bank should raise the nominal interest rate by more than one percentage point.

Taylor rule:  is a monetary-policy rule that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation, output, or other economic conditions. In particular, the rule stipulates that for each one-percent increase in inflation, the central bank should raise the nominal interest rate by more than one percentage point.

The Pact for the euro: It´s a plan in which some member states of the European Union make concrete commitments to a list of political reforms which are intended to improve the fiscal strength and competitiveness of each country.

Time inconsistency: It means that there are future incentives to deviate from such a policy even if the available information does not change; not consistent in time with a decision.

Time‐varying capital requirements:It means that the capital requirements have not been the same all the time. This is one of the policies mentioned on the “Macroprudential Approach to Financial Regulation” done by Hanson, Kashyap and Stein.

Top-down analysis: The top-down analysis looks at the overall market and uses this information to identify the company demographics and target mark. This analysis looks at macroeconomic variables, as the state of the overall economy plays a big role in the investment decision.

Transfer value:It is the value the SAREB pays for the assets it buys to other banks. And it is lower  than its real economic value or book value.

Value at risk:It is a widely used risk measure of the risk of loss on a specific portfolio of financial assets.The risk manager’s job is to ensure that risks are not taken beyond the level at which the firm can absorb the losses of a probable worst outcome.

Wealth effect (on quantity of leisure): It tells that if people are richer, they can afford more leisure, and therefore, they will work less.

Zero‐lower bound on interest rates: It is a macroeconomic problem that occurs when the short-term nominal interest rate is at or near zero, causing a liquidity trap and limiting the capacity that the central bank has to stimulate economic growth.