Glossary
Financial literacy – Glossary
B
Bank of Finland
The central bank and national monetary authority of Finland and a member of the European System of Central Banks and the Eurosystem. Among other things, the Bank of Finland issues new euro banknotes and coins in Finland and participates in the preparation, decision-making and implementation of the monetary policy of the Eurosystem.
Barter
The exchange of goods and services for other goods and services without using money as a medium of exchange. Barter generally requires a mutual need for the items being traded.
BIS (Bank for International Settlements)
The BIS is a forum for international cooperation in monetary issues, a monetary research centre, a producer of statistics, and a kind of banker for central banks. In addition, the BIS often functions as an organiser in international financial arrangements.
C
Central bank
An authority conducting monetary policy which, among other things, adjusts the quantity of money in the economy as well as the interest rates or exchange rates prevailing in the markets. The position and tasks of the central banks in different countries differ considerably. The Bank of Finland is Finland’s central bank and a member of the European System of Central Banks.
Consumer Price Index
The price data of the Consumer Price Index are compiled once a month using a “shopping basket” containing various consumer products. In the euro area, the so-called Harmonised Index of Consumer Prices (HICP) is used. The statistical methods used to compile the HICP have been harmonised so that they are the same in all euro area countries.
Convergence criteria
The criteria used in assessing whether a country may adopt the euro. The criteria measure, among other things, whether the relevant countries’ price development is stable and how they perform in terms of the development of their fiscal positions, exchange rates and long-term interest rates.
D
Deflation
A sustained decline in the general level of prices, e.g. in the Consumer Price Index.
Deposit guarantee
An arrangement which guarantees the funds in depositors’ accounts in circumstances where the deposit bank loses its liquidity. In Finland, the deposit guarantee amounts to EUR 100,000. The objective of the Deposit Guarantee Fund in Finland is to secure depositors’ clams on banks. More information on the activities of the fund is available at Deposit Guarantee Fund.
Derivatives market
The derivatives market is the venue for trading in financial contracts whose value is based on the prices of other underlying securities. Basic types of derivatives include futures, options, swaps and interest rate forwards.
Devaluation
Intentional lowering of the value of the currency against other currencies. Devaluation was used to boost Finnish exports several times in the latter half of the 20th century, as the prices of export products in foreign currency fell considerably after devaluation.
E
Ecofin
Economic and Financial Affairs Council. Ecofin meetings decide on EU economic and financial matters. Meetings are attended by the finance or economy ministers of EU member states.
Employment rate
The employment rate is the percentage of people aged 15–64 who are employed.
EMU (Economic and Monetary Union)
The objective of the EMU is to promote economic cooperation and economic development of the EU member states. The EMU was implemented gradually, and the final step was taken at the beginning of 1999 when the countries participating in the euro area adopted the common currency, the euro.
EONIA (Euro Overnight Index Average)
Weighted average interest rate on overnight loans granted by euro area banks to each other.
ERM II (Exchange Rate Mechanism II)
Exchange rate mechanism, on which cooperation between euro area member states and other EU member states is based. ERM II offers EU countries outside the euro area the opportunity to peg their currencies to the euro at a fixed central rate.
Euribor (Euro Interbank Offered Rate)
Reference rate of the euro area money markets, which is determined on the basis of the interest rates at which major euro area banks offer credit to each other. Euribor is the most commonly used reference rate for housing loans in Finland. Examples of Euribor rates include the Euribor rates for 1 week, 3 months and 12 months.
Euro (€, e)
Common currency of the euro area adopted on 1 January 1999, initially used only as scriptural money. Euro banknotes and coins replaced the markka and other national currencies of the euro area on 1 January 2002. As of the beginning of 2023, the euro area consists of 20 countries.
Euro area
Those European Union member states that have adopted the euro as a common currency. (Map)
Eurosystem
The ECB and the NCBs of those member states that have adopted the euro.
European Central Bank (ECB)
The ECB, the common central bank of the Eurosystem, was established on 1 June 1998, and is located in Frankfurt am Main, Germany.
European System of Central Banks (ESCB)
A system comprising the ECB and the NCBs of all 27 EU member states.
Eurogroup
Group consisting of the finance ministers of the euro area member states, which discusses matters related to the euro area but does not decide on them.
Executive Board of the ECB
One of the decision-making bodies of the European Central Bank. The Executive Board consists of the President and Vice-President of the ECB and four other members.
F
Financial market
A market where parties lend their surplus funds to others who need money.
Financial Supervisory Authority (FIN-FSA)
Financial and insurance supervisory authority supervising, among other things, the operation of banks as well as insurance and pension institutions. The FIN-FSA is connected administratively with the Bank of Finland.
Futures contract
A contract in which one undertakes to buy or sell securities or commodities at a predetermined price on a specified future date.
G
Governing Council of the ECB
The supreme decision-making body of the European Central Bank. The Governing Council comprises all the members of the Executive Board of the ECB and the governors of the national central banks (NCBs) of the countries that have adopted the euro. The governors do not represent their respective countries in the Council but their own expertise.
Grey economy
The grey economy, or shadow economy, refers to the part of economic activity which is allowed under the law but is being pursued clandestinely vis-à-vis tax, customs and other such authorities. Social insurance contributions are not paid on such activity and it is not recorded in official statistics. It does not include illegal economic activity, such as production and trading of narcotics or prostitution.
Gross domestic product (GDP)
The value of all goods and services produced in the economy. Gross domestic product is often used to describe a country’s standard of living. Differences in wealth between different countries are often presented by listing the countries in order based on GDP per capita.
I
Inflation
A sustained increase in the general level of prices, e.g. in the Consumer Price Index.
Interest rate
The extra income, expressed as a percentage, that you receive if you lend money to someone else (or keep money in a bank) or the extra money, expressed as a percentage, that you have to pay if you borrow money.
International Monetary Fund (IMF)
The goal of the International Monetary Fund is to promote sound economic development and stable exchange rates in its member states. Finland has been a member of the IMF since 1948.
K
Key central bank interest rate
The central bank may influence the level of market rates, such as Euribor, by adjusting the key central bank interest rate. Key central bank interest rates are also used to manage the quantity of money.
L
Labour force
The labour force includes all persons aged 15–74 including both the employed and unemployed.
Liquidity
Ability to pay. For example, a company’s liquidity refers to the company’s ability to settle its payments on time.
M
Markka
Finnish currency before the euro.
Money market
Market where short-term finance is sought and short-term investments are made. Money market refers, for example, to a market where banks or companies obtain short-term finance directly from investors.
Monetary policy
Monetary policy is pursued in order to achieve general economic policy objectives. Central banks are responsible for the practical implementation of monetary policy by managing the quantity of money in circulation as well as the interest rates or exchange rates prevailing in the markets.
The Bank of Finland is part of the Eurosystem, whose main monetary policy objective is to maintain price stability and thus protect the purchasing power of the euro. The most important monetary policy tool in the euro area is the key central bank interest rate, which is decided by the Governing Council of the ECB.
Monetary policy transmission mechanism
The process through which monetary policy decisions affect the economy as a whole and the level of prices in particular.
O
The Organisation for Economic Co-operation and Development (OECD)
Established in 1960 as a co-operation organisation of developed industrialised countries. Finland joined the OECD in 1969.
P
Price stability
The ECB’s Governing Council considers that price stability is best maintained by aiming for two per cent inflation over the medium term. Inflation is measured by the Harmonised Index of Consumer Prices (HICP). The ECB’s commitment to this target is symmetric, which means that negative and positive deviations from this target as equally undesirable.
Prime interest rate
The prime interest rate is a bank’s own reference rate, which can be used as the reference rate for both loans and deposits. In practice, the level of the prime interest rate is determined on the basis of the general market conditions and short-term outlook.
R
Real interest rate
The real interest rate where the effect of inflation has been deducted. In a context of high inflation, the real interest rate is considerably lower than the nominal interest rate. Correspondingly, in the context of deflation, the real interest rate is higher than the nominal interest rate.
Reference rate
The interest rate to which the interest on a loan or deposit is linked.
S
Structural unemployment
Unemployment resulting from structural changes in the economy, which results in a mismatch between labour supply and demand. Structural unemployment is caused, for example, by a worker not having the education or work experience to match the available job vacancies or living in an area where there are no jobs available.
T
TARGET (Trans-European Automated Real-time Gross settlement Express Transfer system)
An EU-wide payment system linking national real-time gross payment systems.
U
Unemployment rate
The unemployment rate is the percentage of unemployed people in the labour force. The official unemployment rate is calculated as the percentage of unemployed people aged 15–74 in the labour force of the same age.