Key Economic & Monetary Terms Defined
Central Bank’s Foreign Assets
Account balance consists mainly of reserves.
Central Bank Domestic Assets
Account balance consists of:
- Credits to state enterprises, the State Bank, commercial banks, and other institutions
- Fiscal transfers
- Credit-subordinated obligations of financial institutions
Monetary Aggregate
The stock of money in the economy. It takes different definitions depending on the degree of liquidity of the financial assets that comprise it. The Central Bank of Chile considers three monetary aggregates: M1, M2, and M3.
M1
M1 is the sum of:
- Currency
- Net trade accounts
- Demand deposits with banks (excluding current accounts, net of exchange)
- Sight savings deposits
M2
M2 includes M1 plus:
- Time deposits
- Time savings deposits
- Mutual funds invested in debt instruments with a duration of up to one year
- Deposits of credit unions
Less the time deposits and mutual funds referred to the credit unions.
M3
M3 includes M2 plus:
- Foreign currency deposits
- Documents of the Central Bank of Chile
- Treasury bonds
- Mortgage letters of credit
- Commercial and corporate bonds
- Shares of other mutual funds
- Shares of AFPs in voluntary savings
Less the mutual funds and investment in AFP assets already included in M3.
Economic Agents
The term includes families, businesses, government, and the external sector. Their consumption decisions, investment, production, and portfolio composition reflect the supply and demand for goods, services, and assets of an economy, which together determine the prevailing market conditions.
Rational Agents
Refers to the behavior of economic agents who supposedly base their economic decisions on the maximization of welfare, utilizing available information when making decisions.
Foreign Savings
The account balance of current transactions abroad. It includes exports of goods and services (net of imports) and other net current transactions, whose flows consist of current transfers and factor payments.
Nominal Anchor
A variable chosen by the monetary authority to guide inflation expectations and thus help economic agents achieve the goal of price stability. Central banks typically choose between three nominal anchors that, in turn, define their currency regime: a nominal exchange rate, a monetary aggregate, or an inflation target. In Chile, the Central Bank of Chile uses inflation targeting as its nominal anchor.
Asymmetry of Information (Asymmetric Information)
A concept that describes a situation in which the parties to a transaction or economic interaction do not have the same level of relevant information. Usually, this situation constitutes a market imperfection that reduces welfare. For this reason, the Central Bank of Chile provides the market with a level of information similar to that which the Council uses when making its monetary policy decisions, offering statistical information relevant for understanding policy decisions.
Arbitrage Operations
The simultaneous purchase and sale of various goods or assets designed to achieve a net gain due to differences in their prices. The presence of arbitrage is indicative of an imbalance in the market for goods or assets, and operations associated with arbitrage help to restore this balance by eliminating price differences.