Central Bank Research Articles

Balance sheet implications of a two-tier operation central bank digital currency

Balance sheet implications of a two-tier operation central bank digital currency

Predictive Power of Key Financial Variables During the Unconventional Monetary Policy Era

ABSTRACTThis study investigates the forecasting power of three well‐established financial predictors during the prolonged era of unconventional monetary policy: the term spread, the short‐term interest rate, and stock returns. The focus is on predicting GDP growth in both the United States and the Euro area. Our out‐of‐sample forecasting analysis specifically targets the period characterized by the short‐term interest rate effectively bounded at or near the zero lower bound. We recognize that the information content of the term spread is likely to change under such circumstances. Similarly, the dynamics of the short‐term interest rate could be altered due to unconventional monetary policy measures. To address this, we modify the short rate calculation by incorporating the shadow interest. This shadow interest rate can go much lower on the negative side than normal interest rates, making it a potentially more accurate rate to describe the monetary policy stance of central banks. The forecasting analysis covers the period from 2009:1 to 2022:3. Our results unambiguously reveal that the predictive power of the term spread completely vanishes during the zero lower bound era. Although the shadow rate has minor predictive content, the strongest predictor consistently lies in real stock returns during unconventional monetary policy. Our findings challenge the conventional wisdom and the stylized fact of the term spread as the most reliable financial predictor for economic activity. According to our results, this does not hold true under unconventional monetary policy, and using the shadow interest rate does not make a major difference in that respect. By shedding light on the changing dynamics during unconventional monetary policy, our study contributes novel insights to the existing literature.

The Principle of Cost-Based Supervision in Practice

A key response of financial regulators around the world to the financial and economic crises of ten years ago has been the formation of supervisory committees. Such committees now exist in several countries worldwide. Consequently, many regulators fund their supervisory function by charging their supervisees. The objective of this paper is to compare how these regulators charge fees, identify common practices, draw conclusion from observations, and provide relevant recommendations. This paper especially focuses on the Federal Reserve, the European Central Bank and the Bank of England that charge fees just enough to recover the cost of supervisory function, or those that follow what this paper refers to as the “principle of cost-based supervision.” A discussion on how selected examples of regulators practice the principle of cost-based supervision follows. Simulations of fees using selected procedures to supervisees in the Czech Republic and Greece follow. Then this paper introduces the asset elasticity of cost notated as n and simulates the hypothetical supervisory fee if n is constant.

Perspectives of the World Economy from a Geopolitical Perspective

Global economic activity proved highly resilient during the disinflationary period 2022-2023. Employment and income growth remained relatively steady, as favorable supply and demand developments supported the major economies, despite rising central bank interest rates aimed at restoring price stability. As inflation converges towards target levels and central banks move towards an easing policy stance, a tightening of fiscal policies aimed at reducing the high level of public debt, with higher taxes and lower public spending, is expected to affect overall economic growth. The pace of expansion is also expected to remain subdued by historical standards, reflecting factors including the longer-term consequences of the COVID-19 pandemic, Russia's invasion of Ukraine, weak productivity growth and rising geo-economic fragmentation. The economic outlook has been realized through a statistical approach of the indicators provided by the International Monetary Fund by extrapolating them through linear regression until 2029, using credible and reliable sources of information from specialized economic publications, through an innovative proprietary approach.

Does tight monetary policy threaten the soundness of Korean banks?

This study analysed the relationship between the implementation of the Central Bank of Korea's tight monetary policy due to the recent deepening of inflation and the soundness of Korean banks. This study focused on the fact that the recently published research results of Jung (2023) were different from previous research results. The traditional result is that tight monetary policy reduces loan defaults by shrinking banks' lending capacity. However, Jung (2023), who analysed banks in the EU, claims that loan defaults do not increase despite easing monetary policy. This study empirically analysed the risk indicators that evaluate the financial soundness of banks by dividing them into the financial insolvency, financing costs, recapitalization, and risk holding. The research results are as follows. First, tight monetary policy reduces banks' loan defaults in line with Gambacorta and Mistrulli (2004) instead of Jung (2023). Second, banks' financing costs increased due to the tight monetary policy with same context to the claims of Borio and Hofmann (2017) and Jung (2023). Third, banks' recapitalization level actually decreased due to tight monetary policy as argument of Jung (2023). Fourth, tight monetary policy had no significant relationship with banks' risk taking behaviour in consistent with Diamond and Rajan (2011) and Jimenez et al. (2012). In conclusion, tight monetary policy reduces insolvency of loans, but increases potential risk factors such as increased financing costs and reduced recapitalization in the future. Therefore, this study suggests novel findings and policy challenges.

UNDER THE LOAN: AN ANALYSIS OF ARMENIAN BANKING SECTOR AND CREDIT TRENDS

This study examines recent trends in Armenia's banking sector and export patterns, revealing underlying economic vulnerabilities despite apparent growth. Using data from the Central Bank of Armenia and official trade statistics, this paper analyzes shifts in lending patterns across various economic sectors and changes in export composition. Our findings indicate a concerning decline in industrial sector lending, coupled with a significant increase in mortgage and consumer loans. Additionally, we observe a heavy reliance on precious metal re-exports for economic growth, raising questions about the sustainability of Armenia's current economic trajectory. This research contributes to the understanding of potential risks in Armenia's financial system and highlights the need for diversification in its export base.

The Role of Central Bank of Nigeria in Exchange Rate Stabilization

The study X-rays the role of Central Bank of Nigeria (CBN) in exchange rate stability in Nigeria, using quarterly time series data. The study adopts GARCH family models to decipher the potency of CBN’s monetary policy in exchange rate stability in Nigeria. Anchor interest rate, official exchange rate, and money supply were incorporated into the variance equation to determine their exact impact on the volatility variable (conditional variance). Empirical results show that Anchor interest rate, official exchange rate, and money supply are key in exchange rate stability in Nigeria. The study also finds that despite CBN’s official intervention, exchange rate instability in Nigeria persists overtime. It concludes that Central Bank of Nigeria has a major role to play in managing exchange rate volatility in Nigeria especially when it uses the aforementioned monetary policy tools.

Gender Inequality and Economic Growth in Nigeria: A Granger-Causality Analysis (2009–2023)

This study examined the causality relationship between gender inequality and economic growth in Nigeria, covering the period 2009–2023. The study was anchored on two inequality theories, namely functionalist theory and conflict theory. The ex-post facto was used as the research design for the study. Data for the study were extracted from the World Development Index of the World Bank and the Central Bank of Nigeria (CBN) Statistical Bulletin (2023). The method of data analysis adopted in the study was the Granger-Causality Analysis with the Unit-Root employed to estimate the stationarity status of the variables. The results of the study reveal that there is a causality relationship existing between gender inequality and economic growth in Nigeria, covering the period 2009 to 2023. However, the result reveals that the relationship is bi-directional, flowing from gender inequality to economic. The F-statistics and corresponding probability values show that gender inequality granger causes economic growth. The GIE yielded a p-value of 0.0037 < 0.05, GIEPP yielded a p-value of 0.0137 < 0.05, GHIC yielded 0.0108 < 0.05, and GIED yielded 0.0341 < 0.05. Comprehensive policy interventions that promote gender equality in education, employment, and political representation are necessary to ensure that Nigeria's economic growth is inclusive and resilient.

Towards a Greener Future: Sustainable Banking Practices in Bangladeshs Commercial Banks

Green Banking is nowadays the most crucial issues in the financial arena. Globally the financial institutions are trying to accord to conserve the environment. The central bank of Bangladesh also formed some policy regulations for the banks and financial institutions to gain feasible development. The prime objectives of such article toward present the current status of sustainable banking practices of commercial banks in Bangladesh. A questionnaire survey method was used to collect required data about green banking awareness, online banking, greener future, natural environment, ethical and energy efficiency, training for consumer awareness, communication transaction, solar& biogas, green deposits and accounts, sustainability of banking, minimizing greenhouse effects, reducing carbon footprint from banking activities, pollution checkup camps, mitigate the risk of climate change, focuses on saving paper, debit & credit cards practices on 300 employees of different commercial banks. Also secondary data was collected from various articles to learn throughout the green banking implementation. From this research it has been figured out that there is designed green banking practices of merchant banks in Bangladesh. In order to improve the degree of satisfaction, motivation of clients various programs are offered by the commercial banks. This report is not sufficient for developing any conclusion but still the report may be useful for designing any further study to evaluate the green banking facilities provided by the financial institutions in Bangladesh.

How do analyst recommendations on banks respond to monetary policy news? An application to the Eurozone

ABSTRACT We assess the extent to which stock analysts consider European Central Bank monetary policy decisions when formulating their investment recommendations on European banks from 2002 to 2020. To identify monetary policy shocks, we extract monetary policy factors from high-frequency rate movements surrounding monetary policy announcements. Our findings indicate that stock analysts are more concerned with non-standard (or unconventional) monetary policy measures than standard policy measures. We also demonstrate that analysts interpret restrictive (accommodative) monetary surprises as positive (negative) news for bank financial health, particularly during periods characterized by high levels of financial uncertainty. Finally, we emphasize that the reaction of stock recommendations to rate- and forward guidance-related decisions is primarily influenced by the implicit disclosure of information on the economic outlook by the ECB along with its monetary policy decision.

Digital Currencies of Central Banks (CBDC) as a New Institution of Digital Money Circulation: Legal Essence, History, Foreign Experience

The article is devoted to the study of the genesis of the institute of digital currencies issued by central banks, motives and key stages of launching projects for their implementation. The article analyzes the cases of foreign countries in the field of launching their national digital currencies, compares approaches to the legal regulation of digital currencies of central banks and their types. Also, the possibilities for the cross-border use of CBDC and other digital tools in the context of current sanctions restrictions are explored. The article analyzes in detail the legal essence of digital currencies of central banks, and particularly the digital ruble, as well as the features of the legal technique of legislative acts regulating public relations in the field of introduction and circulation of the digital ruble.

The impact of dollar price fluctuations on the GDP of developing countries: Iraq as a model

The exchange rate is a tool of monetary policy, which is a matter of monetary policy, determined by the Central Bank of Iraq, as well as the subject of the exchange rate of complex topics, and the importance of this research lies in understanding the impact of dollar price fluctuations on the Iraqi economy, which contributes to enhancing knowledge about how external factors interact with local economic conditions, providing valuable recommendations for decision-makers to design effective strategies to deal with these fluctuations and achieve greater economic stability. The descriptive approach was used to collect and analyze economic data related to dollar price fluctuations and its impact on GDP, which helps to understand the relationships between these variables in Iraq during the period (2003-2024), the most important conclusions reached by the research that the general trend indicates sustainable growth in GDP, but economic challenges, such as exchange rate fluctuations and inflation, need to be effectively addressed. The government and central bank should promote economic stability through effective monetary policies that support growth and maintain exchange rate stability.

Consumer Acceptance of Central Bank Digital Currency in a Fully Launched Market

Since 2020 the number of countries and currency unions exploring the implementation of central bank digital currency (CBDC) has increased by approximately 300 percent. The literature shows an abundance of technical feasibility studies and a dearth of research on consumer adoption. This study investigates consumer adoption of CBDC in a market (Jamaica) in which it was already launched. Data was collected from 200 respondents based on a convenience sample. A conceptual model was constructed based on the unified theory of acceptance and use of technology. To validate the model and test the six hypotheses we employed PLS-SEM partial least squares structural equation modeling. Three of the six hypotheses were supported: behavioral intention has a significant positive impact on user behavior, social influence had a significant positive impact on behavioral intention, and facilitating conditions has a significant positive impact on user behavior. Age and gender had no moderating effect. This is the first study done in a market where CBDC was implemented, done on consumers and provided jurisdictional recommendation to create network effects and increase adoption

Financial Sector Reforms and Inflation-Growth Nexus

In the 1980s, Pakistan's financial reforms reduced central bank borrowing, raising government debt and tax collection needs. In this context, the conventional approach to evaluating the costs and benefits of low inflation proves inadequate. The sacrifice ratio (SR) focuses on demand contraction's impact on economic activity and fails to capture the true costs of inflation by overlooking the supply-side effects of reduced fiscal space. This study re-evaluates the SR, accounting for both the demand contraction channel and the long-term supply side impact of diminished fiscal space. We hypothesize that the cumulative costs outweigh the long-term benefits of price stability. By incorporating fiscal space scenarios into the time-series model for SR estimation; our results indicate an SR approximately double that found in earlier studies. These findings highlight the importance of incorporating fiscal implications into monetary policy decisions to support sustainable economic growth.

Impact of Financial Intermediation and Regulatory Frameworks on Financial Deepening and Economic Growth: Insights from Lesotho

Purpose: The purpose of this study is to analyse the impact of financial intermediation and regulatory frameworks on financial deepening and economic growth in Lesotho, utilizing data from 2003 to 2022. The objective is to explore the relationships between selected financial and economic indicators and assessing their influence on financial deepening. Methodology: This study utilized secondary time series data, which poses challenges regarding authenticity and reliability since it was collected by external parties. However, these concerns were addressed by using data from reputable global agencies like the IMF, World Bank, and the Central Bank of Lesotho’s annual report from 2003 to 2022. The analysis was conducted using the Ordinary Least Squares (OLS) regression method. Findings: The findings highlight the complex role of financial intermediation and regulatory frameworks in shaping financial deepening and economic growth. Higher cash reserve ratios and treasury bill rates negatively affect financial deepening by reducing liquidity and increasing credit costs. However, increased commercial bank deposits with the central bank positively contribute to financial stability and deepening. Moderate inflation also fosters financial deepening by raising the nominal value of financial assets. While ATMs per capita enhance financial access and growth, an increase in bank branches per capita shows inefficiencies, underscoring the need for effective infrastructure and service delivery. Unique Contribution to Theory, Policy and Practice: The study suggests that policymakers should adjust cash reserve requirements, monitor credit expansion to avoid over-lending, and improve banking infrastructure. It highlights the need for careful interest rate management and promoting financial innovation to enhance market depth.

The Repo Market and Conflict Inflation

This article seeks to connect today's inflation with one of the least studied and understood creations of the Federal Reserve - the repurchase (repo) market. Despite decades of existence, it is only in the last few years that the repo market has ceased to function smoothly, experiencing first a moment of crisis followed by one of great profitability. When functioning properly, the repo market went virtually unnoticed. Now that it is not, the market has gained the attention of mainstream economics as well as policy makers. However, conventional academic analysis is limited and cannot fully capture the effects that the repo market has had on the overall economy. In this article, we argue that the causes of the pandemic inflation and its public policy response can be understood as the culmination of the longer term currents of globalized financialization and central bank independence. To sharpen our focus on the shorter term, we construct upon the heterodox position of conflict inflation, and argue that the repo market and its principle actors should be considered within the discussion.

Manufacturing Sub-Sector Dynamics and Economic Growth in Nigeria (1981-2022)

This study examined the impact of manufacturing sub-sectors dynamics on economic growth in Nigeria covering the period 1981-2022. Data for the study were extracted from the Central Bank of Nigeria (CBN) statistical bulletin and World Development Index (WDI) 2022. The method of data analysis used is the linear regression method with the application of the Error Correction Model (ECM). The major findings of the study reveal that Cement production (CP) contributes positively but insignificantly to economic growth in Nigeria (β = 2.622724 and p-value = 0.4414 > 0.05), Beverages and Tobacco Production (BTP) contributes positively but insignificantly to economic growth in Nigeria (β = 2.040513 and p-value = 0.0018 > 0.05), Chemical and Pharmaceuticals Production (CHP) contributes negatively but insignificantly to economic growth in Nigeria (β = -17.39120 and p-value = 0.5188 > 0.05) and Pulp paper and paper products (PPP) contribute positively but insignificantly to economic growth in Nigeria (β = 56.85029 and p-value = 0.5062 > 0.05). It is therefore the recommendation of the study that the government should create an enabling environment and adjust its taxation rate on these companies which is currently at 24% to around 18% and the federal and state governments should create a system to protect forests from illegal loggers who are indiscriminately exploiting and felling the national trees.

Microprudential Regulations and Bank Lending in Nigeria

Objectives: The current study aimed at investigating the relationship between microprudential regulations and bank lending in Nigeria. Theoretical framework: The theoretical underpinning of the study is drawn on the theory of risk-return tradeoff which maintains that potential return rises with an increase in risk. Method: Financial data of 13 banks over a period of 15 years were sourced from the repository of Central Bank of Nigeria, and were analyzed using the Panel (Least Squares) Multiple regression technique. Results and Discussions: The result of analyses revealed a high R-squared value of 0.75, an indication that microprudential regulation accounted for 75% variation in profitability in the Nigeria banking institution. Also, the F-statistic of 101.31 and a p-value of 0.000, indicated that the Ordinary Least Square regression model is statistically significant at the 1% level. Overall, microprudential regulation impact on lending and profitability in Nigeria. Research Implications: More so, the study’s relevance is evident in its applications to the principles and practice of lending, fund mobilization and other finance related policies and decisions in the banking sector. Originality/ Value: The outcome of the current study is valid and can be used for statistical inference. The conceptual framework of the study is a novel model that demonstrates how the variables in the study are interconnected. Furthermore, the model specification presents a viable template for financial speculations and calculations.

Effect of Inflation Rate on government bond yields listed at the Nairobi Securities Exchange.

This study aimed to determine the effect of inflation rates on government bond yields listed on the Nairobi Securities Exchange (NSE). The primary objective was to assess how fluctuations in inflation impact the yields of 15-year government bonds over a 16-year period, from the first quarter of 2007 to the first quarter of 2023. The study applied liquidity premium theory, as posited by Brennan (1979), which suggests that investors require a liquidity premium, or higher yield, during inflationary periods to compensate for the erosion of purchasing power in fixed-income investments. Given this theoretical framework, the research sought to quantify the relationship between inflation rates and bond yields, considering how rising inflation prompts higher yields to maintain purchasing power.The study employed a causal-comparative research design, utilizing secondary data on bond yields and inflation rates sourced from NSE and Central Bank of Kenya records. Key diagnostic tests, such as the Jarque-Bera test for normality, Breusch-Pagan-Godfrey test for heteroscedasticity, and Augmented Dickey-Fuller test for stationarity, ensured data validity and reliability. The Vector Error Correction Model (VECM) was used to analyze both short- and long-term relationships between inflation and bond yields. Findings revealed a statistically significant positive correlation between inflation rates and government bond yields, with inflation accounting for 45% of the variance in bond yields. The standardized coefficient of 0.67 suggested a moderate-to-strong association, highlighting inflation’s critical role in bond pricing. Based on these results, it is recommended that investors and policymakers closely monitor inflation trends as they influence bond yields and market performance. Further research could explore other macroeconomic factors, such as interest rates, to offer a more comprehensive view of bond market dynamics in emerging economies.

Foreign Portfolio Investment and Capital Market Development in Nigeria

This study investigates the impact of foreign portfolio investment (FPI) on the development of the Nigerian capital market from 1986 to 2023, addressing challenges such as exchange rate volatility and inadequate technological advancement. The research aims to explore the following questions: What is the relationship between foreign portfolio investments and capital market development in Nigeria? How do exchange rate volatility influence the capital market development in Nigeria? What role do technological advancements play in enhancing market performance and attracting foreign investors? Data were sourced from the Central Bank of Nigeria Statistical Bulletin and the National Bureau of Statistics. A quantitative methodology was employed, utilizing the Johansen co-integration test, Vector Error Correction Model (VECM), and Granger causality test to analyze secondary time-series data. The Johansen co-integration test revealed a long-run relationship among the variables, while the VECM indicated that FPI negatively impacts market capitalization. Additionally, the Granger causality test demonstrated unidirectional causality from capital market development to FPI. To address the identified challenges, the study recommends that policymakers create a more supportive environment that ensures foreign investors can repatriate capital and earnings. The government should prioritize exchange rate stability that reflects market realities to enhance investor confidence. Investments in advanced technology are crucial to improving efficiency and accountability in market transactions. By adopting these targeted recommendations, Nigeria can better leverage FPI to foster capital market growth and promote sustainable economic development. JEL Codes: G15, O16