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Global Aspects of Central Bank Policies:
Abstract
There are various aspects that make a currency international including its use in trade settlement, for investment, as denomination in bond issuances on international markets and as a reserve currency at central banks.
The article analyzes the functional features of the US dollar as a global reserve currency, the factors weakening its position in the global monetary and financial system (GMFS), as well as the directions and trends in the development of the monetary functions of the Russian ruble in international circulation in modern conditions.
The purpose of the study is to develop conceptual approaches to the analysis of the functions of money in international circulation in new conditions.
The objectives of the study are to analyze the factors and consequences of the changed qualitative and quantitative characteristics of the use of the US dollar as the “anchor” of the GMFS, as well as to assess the perspectives of the development of monetary functions and the exchange rate mechanism of the Russian ruble. The research methodology includes scientific and methodological approaches to the implementation of monetary functions and the exchange rate mechanism of national currencies, analysis of statistical and analytical information of the Bank of Russia, international financial organizations, official reports of government bodies, scientific monographs and publications of Russian and foreign economists, and periodicals. The authors conclude that it is advisable for Russian organizations to use rationally trading currency backed primarily by gold and other strategic goods in settlements with interested partners in foreign economic activity.
Global central banks are unwinding their balance sheets, flattening the yield curve, and inverting it; with global trade tensions, appreciating dollar (liabilities), and emerging capital market stress (bond sell off/capital outflows), the global economy is extremely fragile and could experience a financial crisis and recession by 2020 (the consensus is by 2021). Systemic fragility is caused by policy mistakes, made by central bankers. These decisions make the financial system more fragile, as current central bank ideologies and orthodoxy are deficient, and unorthodox. Central bank policies are making matters worse, by driving costs of capital to zero (negative), replacing real for financial assets, printing trillions to bail out banks, and purchasing bad debt and defective financial products, allowing massive leakage of capital to flow unregulated (shadow banking) across globe platforms, etc.; and all with no effect on real economic growth, wage growth, labor participation, inflation, and more importantly, standards of living and social welfare.
This paper presents the first comprehensive Target database of the Eurozone and interprets it from an economic perspective. We show that the Target accounts measure the intra-Eurozone balances of payments and indirectly also international credit given through the Eurosystem in terms of reallocating the ECB's net refinancing credit. We argue that the Euro crisis is a balance-of-payments crisis similar to the Bretton Woods crisis, and document to what extent the Target credit financed the current account deficits and outright capital flight in Greece, Ireland, Portugal, Spain and Italy. To prevent the ECB from undermining the allocative role of the capital market, we propose adopting the US system of credit redemption between the District Feds.
The present paper evaluates the international status of the Chinese currency, the renminbi (RMB), by examining its use in the global market. Specifically, the discussion focuses on the recent developments of RMB trading in the global foreign exchange market, cross-border trade settlement in RMB, the Hong Kong offshore market and China's policies relating to the RMB. The evidence suggests that the use of the RMB overseas, especially in trade financing and in the off-shore market, has increased rapidly in recent years. However, compared with the size of the Chinese economy, the current scale of the use of the RMB is quite small. Although the RMB has great potential to become an international currency, its acceptance in the global economy is affected by both economic and political factors. Attaining a fully fledged international RMB is still a distant goal.
We identify incentives generated by the Bretton Woods II system that may have contributed to the sub-prime liquidity crisis now working its way through the international monetary system. We then evaluate the persistent conjecture that the liquidity crisis is or will become a balance of payments crisis for the United States. Given that it happens, the additional costs associated with a sudden stop of net capital flows to the United States could be quite substantial. But we observe that emerging market governments have continued to acquire US assets even as yields have fallen, and the incentives for continuing to do so remain strong. Moreover, the Bretton Woods II system, which has clearly been the most resilient of the forces driving current markets, continues to generate low real interest rates in industrial countries and growth in emerging markets that will help limit the damage from the liquidity crisis. Copyright © 2009 Blackwell Publishing Ltd.
What are the costs and benefits of the dollar's status as the key currency in the international monetary system? Here, we present a calibrated two country model in which all exports are invoiced in the key currency, and government bonds denominated in the key currency are held internationally to facilitate trade, and as official reserve assets. We show that the “exorbitant privilege” accruing to the key currency country comes from three sources: (1) a bond seigniorage that we estimate to be worth about a half a percent of consumption per period to the United States, (2) asymmetric responses to exogenous shocks that are worth an additional quarter of a percent of consumption per period, and (3) a macroeconomic hegemony in monetary and fiscal policy, reflecting the fact that the key currency's policy instruments are more potent. But, there is also an exorbitant risk to being the key currency country. We show that the costs of a potential dumping of key currency bonds are also substantial. Moreover, there appear to be no obvious monetary or fiscal policy responses that would lower the costs significantly.
We review the findings of the literature on the benefits of international financial flows and find that they are quantitatively elusive. We then present evidence on the existence of a global cycle in gross cross-border flows, asset prices and leverage and discuss its impact on monetary policy autonomy across different exchange rate regimes. We focus in particular on the effect of US monetary policy shocks on the UK's financial conditions.
This paper characterises the effects of reserve requirements on financial loans in the presence of moral hazard on the lender side and sovereign risk on the borrower side. The impacts of such reserve requirements on the equilibrium default risk and borrowing are analysed and their welfare implications discussed. More generous bailouts, financed by the high-income block, encourage borrowing and increase the probability of default. The optimal reserve requirements for both lender and borrower are characterised. The introduction of a reserve requirement in either country reduces the default risk and raises the welfare of both the high-income and the emerging-market economies.
The global financial crisis raises questions about the proper objectives of financial regulation and how best to meet them. Traditionally, capital requirements have been the cornerstone of bank regulation. However, the run on the investment bank Bear Stearns in March 2008 led to its demise even though Bear Stearns met the letter of its regulatory capital requirements. The risk-based capital requirements that underpin the Basel approach to bank regulation fail to distinguish between the inherent riskiness of an asset and its systemic importance. Liquidity requirements that constrain the composition of assets may be a necessary complement. A maximum leverage ratio—an idea that has gained favor in the United States and more recently in Switzerland—may also prove beneficial, deriving its rationale not from the traditional view that capital is a buffer against losses on assets, but rather from the importance of stabilizing liabilities in an interrelated financial system.
Developing Asia experienced a sharp surge in foreign currency reserves prior to the 2008–9 crisis. The global crisis has been associated with an unprecedented rise of swap agreements between central banks of larger economies and their counterparts in smaller economies. We explore whether such swap lines can reduce the need for reserve accumulation. The evidence suggests that there is only a limited scope for swaps to substitute for reserves. The selectivity of the swap lines indicates that only countries with significant trade and financial linkages can expect access to such ad hoc arrangements, on a case by case basis. Moral hazard concerns suggest that the applicability of these arrangements will remain limited. However, deepening swap agreements and regional reserve pooling arrangements may weaken the precautionary motive for reserve accumulation.
The authors construct a model of a dynamic economy in which lenders cannot force borrowers to repay their debts unless the debts are secured. In such an economy, durable assets play a dual role: not only are they factors of production but they also serve as collateral for loans. The dynamic interaction between credit limits and asset prices turns out to be a powerful transmission mechanism by which the effects of shocks persist, amplify, and spill over to other sectors. The authors show that small, temporary shocks to technology or income distribution can generate large, persistent fluctuations in output and asset prices. Copyright 1997 by the University of Chicago.
This paper develops a simple neoclassical model of the business cycle in which the condition of borrowers' balance sheets is a source of output dynamics. The mechanism is that higher borrower net worth reduces the agency costs of financing real capital investments. Business upturns improve net worth, lower agency costs, and increase investment, which amplifies the upturn; vice versa, for downturns. Shocks that affect net worth (as in a debt-deflation) can initiate fluctuations. Copyright 1989 by American Economic Association.
Discussion of “TARGET2 and central bank balance sheets”
- Westermann
Global liquidity: where it stands, and why it matters
- Jaime Caruana
Renminbising China's foreign assets
- Cheung
Global liquidity: public and private
- Landau
Global liquidity expansion: effects on “receiving” economies and policy response options
- IMF
Enhancing international monetary stability - a role for the SDR? Paper prepared by the Strategy, Policy, and Review Department