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Back Matter

International Monetary Fund
Published Date:
June 1989
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    Appendix Glossary of TermsBilateral exchange rate grid:

    The set of bilateral central rates between the currencies of participating member states.

    Central rate:

    Benchmark rate expressed in terms of the ECU from which the mandatory intervention points are determined.

    Central rate grid:

    In the EMS, with fixed but adjustable exchange rates, each currency has a central rate expressed in terms of the ECU. These central rates determine a grid of bilateral central rates, around which fluctuation margins of plus/minus 2.25 percent (6 percent for the Italian lira) have been established. Although sterling is not participating in the exchange rate mechanism, a notional central rate has been assigned to it to operate the divergence indicator.

    Commission of the European Communities:

    The executive and policy-proposing body of the Communities; its members must act in full independence both of the member governments and of the Council of Ministers.

    Committee of Central Bank Governors:

    Advisory body composed of governors of central banks and involved in preparation of all decisions and resolutions of the Council of Ministers on monetary policy.

    Council of Ministers:

    The only Community institution whose members directly represent the member governments. Representatives of the national governments sit in the Council, and the foreign ministers are generally present for major decisions. The Council takes decisions in one of three ways; unanimously, or by simple majority, or by a weighted majority according to various circumstances laid down in the Treaties.


    Issued by the Council of Ministers and binding as to the result to be achieved. Each member state may decide how to achieve that result, and may have to amend its own national laws or administrative practices to bring them into line with Community law.

    Divergence indicator:

    Intended to further economic alignment among participating countries in the EMS by detecting Community currencies that happen to deviate upward or downward from the Community average as represented by the ECU. When a currency crosses its threshold of divergence, there is the presumption that the authorities will implement corrective measures, including diversified intervention in the foreign exchange market and domestic economic policy measures. Although at times movements in the divergence indicator have resulted in some action, the indicator has not been able to assume the role of linking exchange rate developments to an increasing convergence of economic policies.


    European Communities.


    European central bank.


    European Economic Community.


    European Monetary Cooperation Fund.


    European Monetary System.


    Exchange rate mechanism.

    European Commission:

    See Commission of the European Communities.

    European Communities:

    Established by the Treaty of Paris (1951) and the Treaties of Rome (1957), the institutional structure of the Community (organized along the lines of a national administration) consists of the EC Commission, the Council of Ministers, the European Parliament, and the European Court of Justice.

    European Council:

    At the Paris meeting in December 1974 of heads of government of member countries, it was decided to meet, accompanied by the ministers of foreign affairs, three times a year. These meetings have become known as the European Council, and because it meets with representatives of the Commission present, it is thus also the Council of the European Communities, and as such is empowered to adopt Community instruments in the form laid down by the treaties.

    European currency unit (ECU):

    A composite unit consisting of specified amounts of the currencies of all EMS member countries. It serves as the numeraire for the exchange rate mechanism, as the denominator for operations in both the intervention and the credit mechanisms, as a reference point for the divergence indicator, and as a means of settlement and a reserve asset of EMS central banks.

    European Monetary Cooperation Fund (EMCF):

    A Fund set up to be the embryo of a reserve system of the Community central banks, and to have operational responsibility in a Community currency exchange system. The governors of the Fund are the governors of the member states’ central banks. The Fund uses the Bank for International Settlements as its agent and intervenes on the foreign exchange markets at the request of member states.

    European Parliament:

    Elected by popular vote, it has advisory powers under which it delivers to the Council nonbinding opinions on Commission proposals and has supervisory powers over the Commission. It is also responsible for final approval of the EC budget, although with limited power to amend it. More recently, the Parliament acquired the power to reject or amend Council decisions pertaining to the unification of the EC market under the Single European Act.

    Exchange rate mechanism:

    This mechanism is in two parts: The first is based on maintenance, by means of unlimited intervention on the exchanges, of bilateral limits of fluctuations between participating countries. The second is based on the divergence indicator, whose purpose is to establish a presumption to take action on the part of the authorities responsible for the currency whose rate exceeds certain limits that are fixed in terms of the ECU and that, generally speaking, because they are narrower than those demarcating the bilateral margins of fluctuation, will be reached before the latter.

    Intervention limits:

    Calculated by applying to each of the bilateral central rates the maximum margin of fluctuation of plus/minus 2.25 percent (6 percent for the lira). Participating countries are obliged to keep the rates of their currencies within these bilateral limits.

    Intramarginal intervention:

    Apart from compulsory intervention at the bilateral limits, there is provision for intervention before these limits are reached. There are two types of such intramarginal intervention: (1) through optional operations initiated by any central bank (such as intervention in dollars); and (2) interventions that a country may have to carry out under the rules governing the operation of the divergence indicator. As a general rule, the divergence threshold will be reached before the currency in question reaches its bilateral limit against another currency. As soon as the threshold is crossed, the currency in question will be in a position that may cause strains within the system, and, to prevent this, there is a presumption that the country issuing the diverging currency will act to remedy the situation, and such action may take the form of diversified intervention.

    Medium-term financial support facility (MTFS):

    Medium-term financial assistance granted by the Council to any member state experiencing difficulties or seriously threatened with difficulties as regards its balance of payments. Assistance is conditional, with a borrower country having to agree to certain economic and monetary conditions. It is denominated in ECUs and repayable within a period of between two and five years.

    Monetary Committee:

    A consultative body set up to promote coordination of monetary policies.


    The readjustment of the central rates of the EMS.

    Short-term monetary support (STMS):

    To help meet financing needs arising from temporary balance of payments deficits caused by unforeseen difficulties or cyclical divergences. The mechanism is based on a system of debtor and creditor quotas that determine each Community central bank’s borrowing entitlement and financing obligations. These credits are granted by central banks for three months and are twice renewable.

    Threshold of divergence:

    The divergence indicator shows the movement of the exchange rate of each EMS currency against the (weighted) average movement of other EMS currencies. The criterion used is the divergence of the actual daily rate of the EMS currency, expressed in ECUs, from its ECU central rate. If a currency crosses a threshold of divergence, set at 75 percent of the maximum divergence spread, this leads to a presumption that the authorities concerned will correct the situation by adequate measures, such as diversified intervention, domestic monetary policy measures, changes in central rates, or other economic policy measures.

    Very short-term financing facility (VSTF):

    A very short-term credit facility that participating central banks grant to each other through the EMCF to permit interventions in Community currencies. Such operations are denominated in ECUs, and the debtor and creditor interest rates are equal to the rates applicable to net users and holders of ECU assets. The duration of such financing is 45 days and can be extended by three months.


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    Recent Occasional Papers of the International Monetary Fund

    42. The Global Effects of Fund-Supported Adjustment Programs, by Morris Goldstein. 1986.

    43. International Capital Markets: Developments and Prospects, by Maxwell Watson, Donald Mathieson, Russell Kincaid, and Eliot Kalter. 1986

    44. A Review of the Fiscal Impulse Measure, by Peter S. Heller, Richard D. Haas, and Ahsan S. Mansur. 1986.

    45. Switzerland’s Role as an International Financial Center, by Benedicte Vibe Christensen. 1986.

    46. Fund-Supported Programs, Fiscal Policy, and Income Distribution: A Study by the Fiscal Affairs Department of the International Monetary Fund. 1986.

    47. Aging and Social Expenditure in the Major Industrial Countries, 1980–2025, by Peter S. Heller, Richard Hemming, Peter W. Kohnert, and a Staff Team from the Fiscal Affairs Department. 1986.

    48. The European Monetary System: Recent Developments, by Horst Ungerer, Owen Evans, Thomas Mayer, and Philip Young. 1986.

    49. Islamic Banking, by Zubair Iqbal and Abbas Mirakhor. 1987.

    50. Strengthening the International Monetary System: Exchange Rates, Surveillance, and Objective Indicators, by Andrew Crockett and Morris Goldstein. 1987.

    51. The Role of the SDR in the International Monetary System, Studies by the Research and Treasurer’s Departments of the International Monetary Fund. 1987.

    52. Structural Reform, Stabilization, and Growth in Turkey, by George Kopits. 1987.

    53. Floating Exchange Rates in Developing Countries: Experience with Auction and Interbank Markets, by Peter J. Quirk. Benedicte Vibe Christensen, Kyung-Mo Huh, and Toshihiko Sasaki. 1987.

    54. Protection and Liberalization: A Review of Analytical Issues, by W. Max Corden. 1987.

    55. Theoretical Aspects of the Design of Fund-Supported Adjustment Programs: A Study by the Research Department of the International Monetary Fund. 1987.

    56. Privatization and Public Enterprises, by Richard Hemming and Ali M. Mansoor, 1988.

    57. The Search for Efficiency in the Adjustment Process: Spain in the 1980s, by Augusto Lopez-Claros. 1988.

    58. The Implications of Fund-Supported Adjustment Programs for Poverty: Experiences in Selected Countries, by Peter S. Heller. A. Lans Bovenberg, Thanos Catsambas. Ke-Young Chu, and Parthasarathi Shome. 1988.

    59. Measurement of Fiscal Impact: Methodological Issues, edited by Mario I. Blejer and Ke-Young Chu. 1988.

    60. Policies for Developing Forward Foreign Exchange Markets, by Peter J. Quirk, Graham Hacche, Viktor Schoofs, and Lothar Weniger, 1988.

    61. Policy Coordination in the European Monetary System. Part 1: The European Monetary System: A Balance Between Rules and Discretion, by Manuel Guitián. Part II: Monetary Coordination Within the European Monetary System: Is There a Rule? by Massimo Russo and Giuseppe Tullio. 1988.

    62. The Common Agricultural Policy of the European Community: Principles and Consequences, by Julius Rosenblatt, Thomas Mayer, Kasper Bartholdy. Dimitrios Demekas, Sanjeev Gupta, and Leslie Lipschitz. 1988.

    63. Issues and Developments in International Trade Policy, by Margaret Kelly, Naheed Kirmani, Miranda Xafa, Clemens Boonekamp, and Peter Winglee. 1988.

    64. The Federal Republic of Germany: Adjustment in a Surplus Country, by Leslie Lipschitz. Jeroen Kremers, Thomas Mayer, and Donogh McDonald. 1989.

    65. Managing Financial Risks in Indebted Developing Countries, by Donald J. Mathieson, David Folkerts-Landau, Timothy Lane, and Iqbal Zaidi, 1989.

    66. The European Monetary System in the Context of the Integration of European Financial Markets, by David Folkerts-Landau and Donald J. Mathieson. 1989.

    Note: For information on the titles and availability of Occasional Papers published prior to 1986, please consult the most recent IMF Publications Catalog or contact IMF Publication Services.

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