Base Money Research Articles

¿Por qué la cuenta de pérdidas y ganancias de los bancos centrales no importa (tanto)?

Rationale Central banks in some developed countries have started to record, or will soon record, losses. These losses are due to the structural changes in their balance sheets after the exceptional measures adopted during the economic crises of recent years, which were necessary to maintain price stability. This article explains why these losses are expected to be temporary and why central banks can continue to perform their functions and deliver on their mandate even when incurring losses. Takeaways •A central bank’s aim is not to maximise profits, but instead to use monetary policy to achieve price stability. •Central banks cannot be insolvent as they issue the currency (base money) with which they continue to cover their operating expenses and meet their present and future payment obligations. •There are numerous examples of central banks that have continued to deliver on their mandates even when incurring losses. In these cases, a robust legal framework that protects central banks’ autonomy is key.

Quantitative easing effectiveness: Evidence from Euro private assets

AbstractProponents of quantitative easing (QE) unconventional policy have rather overstated some evidence that structural time series models do not predict long‐term asset prices and yields as well as naive random walk forecasts, implying that predictions of price reversals cannot be profitable and, therefore, that QE effects are not transitory. Indeed, in this work we present evidence that naive models do not outperform structural vector autoregressive and Markov switching models in out‐of‐sample forecasting of corporate bond yields purchased by the European Central Bank, when the information set includes base money growth. It turns out that structural time series models provide additional information regarding the likelihood of price reversals, thus motivating investors to offset the effects of QE interventions if they perceive unconventional monetary policy regimes as temporary.

Assessing Effectiveness of Structural Monetary Policy in China

Abstract Structural monetary policy (SMP)—differentiated policy action targeting specific economic activity— has become more frequently applied by major central banks lately, although the practice of developmental central banking has been in existence for quite some time. The effectiveness of such structural monetary policy, however, has not been adequately evaluated. In this paper, we attempt to provide a comprehensive analysis of SMP introduced by the People's Bank of China and also to offer a broad framework for thinking about SMP. We first document the brief history and main components of China's SMP and estimate the narrow- and broad-measures of SMP accounting for 17.9 percent and 27.9 percent of base money, respectively, at the end of 2022. We then discuss two key factors determining success of SMP: bank credit flows to the targeted area and risk implications for banks. By applying the difference-in-difference and panel data analysis approaches using a monthly data set of city commercial bank loans, we evaluate the impacts of targeted required reserve ratio (RRR) cuts in 2019 and 2020 on small- and medium-sized enterprise lending. No statistically significant impact is found, whether in the short run or in the long run, and whether for medium-sized enterprises or for micro and small businesses). We conclude that, as no statistically significant impact of targeted RRRs are found, SMP's effectiveness, if exists at all, might be temporary; when facing impaired monetary policy transmission, it is important to conduct careful analysis of its effectiveness and sustainability.

TVECM TO ANALYZE THE RELATIONSHIP BETWEEN NET FOREIGN ASSETS AND CURRENCY CIRCULATION

In the analytical balance sheet of the base money monetary authority, Bank Indonesia explained that net foreign assets (NFA) affected the circulation of base money, including currency. This gives an assumption regarding the indication of a causal relationship between currency circulation and NFA. In addition to the causality test, the primary purpose of this study is to identify long-term equilibrium relationships between NFA and Currency Circulation. The cointegration test obtained r = 1, indicating cointegration (long-term equilibrium). Time series data plots of these two variables tend to have a trend and are not stationary. The Vector Error Correction Model (VECM) is applied as an analytical method used to correct long-term relationships between variables that are not stationary. However, in the concept of VECM deviation and short-term dynamics, the association is assumed to be linear. At the same time, in applying economics, the relationship between economic variables is not necessarily linear. The significance test for the presence of a threshold using a fixed regressor bootstrap shows a threshold effect or nonlinear VECM, so it is necessary to use an analytical method that can combine nonlinearity and cointegration through the Threshold Vector Error Correction Model (TVECM). In this study, modeling of TVECM 2 regimes and three regimes were carried out. TVECM 3 regimes obtain the best model with two threshold values ​​of -310850 and -260156.

Differences in Unconventional Monetary Policy of Both the Federal Reserve Board and the Bank of Japan

This article consists of two dimensions. First, to draw the historically penetrating nature of money-supply, monetary policy, and central banks, to clarify what “conventional” monetary policy is. Conventional monetary policy doesn’t mean the direct control of the base money, but the monetary policy by operating short term interest rate. Therefore, money supply is regulated endogenously. I point out here that we can find in Capital by Karl Marx some basic conceptions required to consider the definition of conventional monetary policy. Second, to define “unconventional policy.” Unconventional monetary policy is the policy which directly controls the amount of base money (simply applying quantitative monetary theory). It is the Bank of Japan (BOJ)’s unconventional monetary policy. However, the Federal Reserve Board (Fed)’s is not the case. The Fed tried to influence the market movement or business cycle by the control of monetary means exclusive of interest rate. Amounts of base money was not the target, but its result. Therefore, I could conclude that the Fed remained in the framework of conventional monetary policy, even though its policy looked like an “unconventional” and “quantitative” one. It is the reason why the Fed could adopt an “exit strategy” flexibly. However, the BOJ has fallen into “monetization” without an “exit strategy” so far.

On the monetary policy in an economy with banks endogenously creating money

AbstractThis paper attempts to employ a microeconomic model (industrial‐organization approach to banking) to formalize the concept that banks in an economy may also unilaterally create money, at least initially, rather than passively multiplying the base money exogenously issued by the Central Bank in the money creation process. It shows that in equilibrium, banks may indeed create money (bank deposits) when making loans without relying on the newly issued base money from the Central Bank. Instead, the endogenously created money by banks would cause the Central Bank to endogenously adjust base money to hit the target policy interest rate.

The Impact of E-money on China's Money Supply

Electronic money alters the form of currency, reduces the demand for cash, alters the manner in which transactions are settled, and alters the quantity of reserves held by our commercial banks. Electronic money makes the relevant factors acting on the base money supply more complex, which will undoubtedly make it more difficult for the central bank to achieve control over the base money, thereby further weakening the central bank's ability to manipulate the money supply and affecting the effectiveness of the central bank's monetary policy target of the money supply. Therefore, a correct understanding of the impact of electronic money development on the base money supply is crucial for enhancing the effectiveness of monetary policy in China in light of the expanding scale of electronic money in China.

Existence of the money multiplier in a developing economy: a case of Saudi Arabia

In this study, cointegration methods are used to test the existence of the money multiplier model in Saudi Arabia for 1997m1-2020m4 and subperiods before and after the 2008 global financial crisis. Residual-based tests support broad (M2 and M3) multipliers over the full sample and pre-crisis period, albeit the M3 multiplier performs better than the M2 multiplier. Johansen's vector autoregression (VAR) and Pesaran et al. (2001) autoregressive distributed lags (ARDL) cointegration and coefficient restriction tests reveal that broad multipliers perform well. Narrow and broad multipliers are mean-reverting in the pre-crisis period, and the M3 multiplier is mean-reverting over the full sample. These multipliers are stable in a dynamic framework. Therefore, the Saudi Arabian Monetary Authority (SAMA) can control money stock and inflation by controlling base money. Narrow and broad multipliers are also predictable and broad monetary aggregates can influence monetary policy.

글로벌 과잉유동성이 신흥시장국 부동산가격에 미치는 영향

This paper analyzes the impact of global excess liquidity, which is caused by unconventional monetary policies of major advanced economies (AE), on the house prices of emerging market economies (EME). The founding says that global excess liquidity, real GDP growth rate, CPI inflation, inter-bank interest rate and base money growth rate mainly affect the house prices of EME during the entire period. But non-linearity, in which the impact of each independent variable on the dependent variable is different between the non-crisis and crisis period, is not clear. Hence, we divide the entire period into two periods, one being “before global financial crisis (GFC)” and the other “after GFC”, to find out whether the behavior of major explanatory variables changes or not. The results say that before GFC, global excess liquidity, real GDP growth rate, CPI inflation, and base money growth rate affected house prices. But after GFC, only real GDP growth rate and base money growth rate affected it while global excess liquidity did not. We put additional variables, “synchronization of monetary policies between AE and EME” and “shares of cross-border claims of international banks”, into our econometric models in order to find out causes of the results above. We found that synchronization of monetary policies between AE and EME affected (it) but shares of cross-border claims of international banks did not.

Collateral-based monetary policy and corporate employment: Evidence from Medium-term Lending Facility in China

Collateral-based monetary policy tools in China aim to guide credit resources to the real economy by injecting base money into banks to support policy objectives, such as promoting employment. This study examines the effects of Medium-term Lending Facilities (MLF) on employment through the bank lending channel. The results of difference-in-differences estimation show that post-MLF implementation, employment growth and labor cost growth of firms with high MLF exposure increase by 8.04% and 5.74%, respectively. The channel test shows that commercial banks with high bond holdings significantly increase lending after MLF implementation, which subsequently increases employment for borrowers of these banks. This effect is more pronounced for firms with high dependence on external financing, strong financing constraints, no qualifications to issue bonds, high sales growth, and belonging to industries supported by industrial policies. MLF also improves the quality of employment, which in turn significantly increases the total factor productivity of firms. Finally, MLF also has a significant positive effect on local aggregate employment growth. Focusing on firm labor hiring decisions, which are crucial to real economic development and social stability, this study has important theoretical and practical implications for furthering our understanding of the effectiveness and feasibility of collateral-based monetary policy tools.

Replacing bank money with base money: Lessons for CBDCs from the ending of private banknotes in Sweden

A number of central banks have started to investigate the possibility of issuing so-called Central Bank Digital Currencies (CBDCs). The aim may be to compete with cryptocurrencies of different kinds but also to replace digital commercial bank money with central bank issued digital money, i.e. replacing bank money with central bank-issued basemoney. In this paper we study a similar experiment when the Swedish central bank, the Riksbank, in 1903 replaced private banknotes with their own notes. The result of this policy was a massive increase in commercial bank credit due to the increase in base money, spurring the ongoing boom even further. A boom that worsened the 1907 crisis. The result is thus questioning the notion that increased monetary issuance by a monetary authority to replace other financial assets as private money or cryptoassets should lead to increased financial stability – as, in fact, it led to the opposite.

Pengaruh Pembayaran Non Tunai dan Tingkat Suku Bunga Kebijakan Terhadap Sistem Pembayaran di Indonesia

This study aims to analyze the effect of non-cash payments and policy interest rates on the demand for money in Indonesia in the long and short term. The analysis method used is the Error Correction Model (ECM) with secondary data including electronic money, Card-Based Payment Instruments, BI-RTGS, SKNBI, policy interest rates and M2. The results showed that in the long run, electronic money and APMK had a positive and significant effect on the demand for money. SKNBI and BI-RTGS had a negative and significant effect on demand for money. “In the short term, APMK has a positive and significant effect on money demand. E-Money, SKNBI and BI-RTGS both have positive and insignificant effects on money demand. Policy interest rates have a negative and insignificant effect on money demand in the long and short term. The implication of this research is that in the future there will be more and more people transacting non-cash because it is considered safer, easier and faster. In addition, the demand for base money is reduced which in turn can affect the implementation of the central bank's duties in implementing monetary policy, especially controlling monetary amounts. The development of information technology will have implications for the reduced role of base money in payment transactions.

The Impact of Some Monetary Indicators on Gross Domestic Investment in Iraq

The paper examines the impact of a number of monetary indicators on gross domestic investment in Iraq for the period 2004-2024, by using a regression analysis model in addition to adopting several statistical techniques in the purpose of testing the model validation. Unit root test results show that gross domestic investment and most of the variables series included in this study depict stationarity in their levels except for net domestic assets, and policy interest rate (end of period) where they depict trend in levels, however, they appear stationary in their first differences. Regression analysis show that except for base money variable, all independent variables included in this model seem to have significant relationships with the dependent variable, and the group of independent variables represented in the model are jointly significant. Cointegration test is established for gross domestic investment and monetary indicators suggesting there is a long-run equilibrium relationship between the series. LM test result reveal that the proposed model is valid as there is no serial correlation in the errors in the model. The results of the study indicate that the policymakers would have to concentrate on creating a favorable environment for private-sector growth in an economy dominated by oil production and public spending, as well as public investment practices require significant reforms by the authorities.

Transmission mechanism of monetary policy and response to outside shocks in 2020 by National Bank of the Republic of Kazakhstan

The article examines the features and current state of monetary policy and transmission mechanism of the National Bank of Kazakhstan. The transmission mechanism is not a tool to achieve the goals set for the development of the modern economy. This mechanism is a set of interactions in economic processes through which the results of decisions or transactions in the framework of monetary policy affect the economy. In this regard, the article describes the level of inflation and its impact on the level of prices for goods and services. The situation with the use of the consumer price index to calculate inflation, calculated on the basis of the analysis of prices in the portfolio of consumer goods and services of the Ministry of National Economy of the Republic of Kazakhstan, is analyzed in detail. Macroeconomic and microeconomic factors, reflecting the viable direction of the monetary policy of the Republic of Kazakhstan, affect the level of the consumer price index. To make decisions, the NBRK conducts research to determine inflation forecasts. Inflationary expectations make it possible to assess the possible impact on the economy. In this context, the article states that the NBRK's inflation target will be achieved through the following channels (base rate, exchange rate and money supply). The conclusion is based on the fact that, given the global pandemic around the world, one can see the NBRK's expansionary monetary policy and decisions to lower the base rate, increase the money supply and stabilize the currency.

Numerical Simulation of Non-cooperative and Cooperative Equilibrium Solutions for a Stochastic Government Debt Stabilization Game

In this article, we consider the impact uncertainty has on policies and realization of targets aimed at the stabilization of government debt. The problem is motivated by the fact that in many countries revenues are to a large extent uncertain. Following Tabellini (TEDC 4: 427–442, 1986), we model the debt stabilization problem as a dynamic game between government and central bank. However, different from Tabellini (TEDC 4: 427–442, 1986) we assume that nominal income in this problem setting is uncertain and model its price dynamics by a stochastic differential equation. By employing the quotient rule from stochastic calculus, government debt, primary fiscal deficit, and base money are scaled by this nominal income process. Then, the debt stabilization problem is formulated within this stochastic framework. Assuming a feedback information structure we solve the problem both within a non-cooperative and cooperative mode of play. To explore the effects of uncertainty on government and central bank polices and debt stability, we perform a simulation study and sensitivity analysis. One of the major conclusions from this study seems to be that cooperation has a smoothing effect on pursued policies but that this does not necessarily lead on average to a better tracking of the debt target. Furthermore, we observe that the more uncertainty there is, the more policymakers are inclined to emphasize the stabilization of debt.

Monetary policy effectiveness in the liquidity trap: a switching regimes approach

Liquidity trap economics seems to have fared particularly well on all counts of its predictions, in the aftermath of the 2008 global financial crisis. Therefore, in this paper we evaluate formally the effectiveness of unconventional monetary policy in a liquidity trap, based on data from Japan, the USA, and the eurozone over periods of liquidity trap conditions (1994–2018 for Japan and 2009–2018 for the USA and the eurozone). Under effective unconventional policies, changes in the base money-growth regime should be associated with similar regime changes in either inflation or investment expenditure growth and the estimation of a switching regimes model allows us to test whether significant joint regime shifts occur in the data. Also, a test of liquidity trap conditions is based on a discrepancy of regime shifts between growth rates of base money and broad money, since this implies a collapse of the money multiplier. Our findings show that drastic shifts in the growth rate of the monetary base do not produce similar behavior for the inflation rate, investment expenditure growth, and broad money growth, thus pointing to liquidity trap conditions and unconventional monetary policy ineffectiveness.

Quantitative easing impotence in the liquidity trap: Further evidence

Quantitative easing (QE) ineffectiveness in periods of liquidity trap conditions has been empirically verified for Japan, USA, and the Eurozone, on the basis of a switching regimes approach. In this work, we present further evidence that unconventional monetary policies are impotent when policy rates are close to their lower bound, using monthly data from Sweden, Switzerland, and the UK, whose central banks also pursued QE policies in the aftermath of the 2008 financial crisis. For all the economies considered, we obtain evidence of drastic regime shifts for base money growth which are successfully captured by a Markov switching regimes representation, but inflation, investment expenditure growth, and broad money growth do not appear to change significantly in different QE policy regimes, thus pointing to unconventional monetary policy impotence.

Central bankers and the rationale for unconventional monetary policies: reasserting, renouncing or recasting monetarism?

Abstract The purpose of this paper is to examine the rationale for the unconventional monetary policies adopted by central banks in response to the Global Financial Crisis. Quantitative easing appears to be a return to monetarist principles. Indeed, the Bank of England emphasised a causal chain running from increases in broad money to spending and inflation, while the Bank of Japan later pointed to a theorised relation between base money and expected inflation. Some aspects of monetarism have been renounced, albeit not necessarily with convincing reasoning. Monetarist principles can also be discerned in the ‘credit view’ associated with the research of two-term US Federal Reserve Chair, Ben Bernanke. An understanding of the banking system and the channels of monetary transmission is still a work in progress.

A MONETARY BUSINESS CYCLE MODEL FOR INDIA

A New Keynesian monetary business cycle model is constructed to study why monetary transmission in India is weak. Our models feature banking and financial sector frictions as well as an informal sector. The predominant channel of monetary transmission is a credit channel. Our main finding is that base money shocks have a larger and more persistent effect on output than an interest rate shock, as in the data. The presence of an informal sector hinders monetary transmission. Contrary to the consensus view, financial repression in the form of a statutory liquidity ratio and administered interest rates, does not weaken monetary transmission. (JEL E31, E32, E44, E52, E63)

Four Principles for a Base Money Regime

What does an ideal base money look like? I maintain that it is (1) stable, (2) demand-elastic, (3) global, and (4) incentive-compatible. I conclude that, since most real world monies fall short of the ideal on one margin or another, one must consider the trade offs when ranking the available alternatives.