domestic credit expansion
domestic credit expansion (DCE)a monetary aggregate that is sometimes used by the INTERNATIONAL MONETARY FUND in requiring monetary restraint on the part of a member country with a balance of payments deficit as a condition of access to the Fund's resources. The main elements of DCE are made up primarily of the annual rate of change of the domestic MONEY SUPPLY
(defined in a number of possible ways) and annual rate of change of external borrowing by the private and public sectors. Under a FIXED EXCHANGE-RATE SYSTEM, excessive monetary expansion, either by an increase in the money supply or overseas financing, can lead to domestic price levels rising at a faster rate than trade partners, resulting in a balance-of-payments deficit. It follows, therefore, that monetary restraint (or, in the last resort, a currency DEVALUATION) is necessary to restore balance-of-payments equilibrium. Under a FLOATING EXCHANGE-RATE SYSTEM, tight control of monetary expansion is less urgent, it is argued, because divergences in domestic price levels between countries will be offset by exchange rate movements. See PURCHASING POWER PARITY THEORY.