Central Banks Worldwide Research Articles

Who upholds the surging gold price? The role of the central bank worldwide

Who upholds the surging gold price? Conventional wisdom suggests that the depreciation of the exchange rate, inflation and economic turmoil are the suspects. Nonetheless, while these factors cease, why does the gold price still stay around hikes? The gold market belongs to a global arena. Different from other commodities, its participants include the national central banks worldwide. However, surprisingly, the role played by these tremendous market participants’ gold holdings on the gold price has been ignored in past empirical works. This research focuses on central banks’ gold holdings to explore who upholds the surging gold price. Several interesting outcomes are derived. First, our empirical evidence shows an inverse phenomenon relative to news reports from the mass media that the gold holdings of central banks worldwide in fact continuously descend. Second, the mainstream countries of the world have not played a main role in the rising trend of the gold price in the recent decade; instead, newly emerging industrialized countries’ central banks’ gold holdings show their significant power in explaining causality to gold price fluctuations. Third, the reason for the persistent gold buying behaviour of emerging economies may be because the increase in the gold price delivers a kind of short squeeze effect to the central banks of emerging countries.

Monetary Policy, Stock Prices and Central Banks – Cross-Country Comparisons of Cointegrated VAR Models

In this paper, we analyze the long-run behavior and short-run dynamics of stock markets across some selected developed and emerging economies – namely the United States, the Euro Area, Japan, the United Kingdom, Australia, South Korea, Thailand and Brazil – in the Cointegrated Vector-Autoregressive (CVAR) framework. The main purpose is to assess empirically if liquidity conditions play a significant role for stock market developments. As an innovation, liquidity conditions enter the analysis from three angles: in the form of a broad monetary aggregate, the interbank overnight rate and net capital flows which in our case stands for the share of global liquidity that arrives in the recipient economy. A second aim is to check empirically whether central banks are able to serve as a driver of the stock market as it, for instance, seems to be the case in late 2012 and 2013 in the wake of the forward guidance conveyed by central banks worldwide.

In This Issue

In This Issue

Obama’s Anticrisis Policy

The U.S. economy and the hegemony of the dollar have for some time been sustained by a gigantic infusion of money from the rest of the world. The enormous size of its debt raises the prospect of the collapse of the dollar as a global reserve currency. Central banks worldwide have almost stopped accumulating dollars, and China has been divesting itself of the mountain of “toxic assets” that U.S. Treasury bonds have become. The fate of the dollar as a reserve currency will depend heavily on the effectiveness of the economic policy implemented by the United States in confronting the current crisis. The massive intervention undertaken has involved placing public funds in the service of a new cycle of capitalist profit-making—a new bubble inflated by public expenditures. When it becomes clear that the rescue plans and stimulus programs of the administration are ineffective and unsustainable, the crisis of confidence in the dollar may enter its final phase. The dilemma for the countries of the Third World will be to configure the new order that follows or be configured by it.

Central Bank Transparency, the Accuracy of Professional Forecasts, and Interest Rate Volatility

Central banks worldwide have become more transparent. An important reason is that democratic societies expect more openness from public institutions. Policymakers also see transparency as a way to improve the predictability of monetary policy, thereby lowering interest rate volatility and contributing to economic stability. Most empirical studies support this view. However, there are three reasons why more research is needed. First, some (mostly theoretical) work suggests that transparency has an adverse effect on predictability. Second, empirical studies have mostly focused on average predictability before and after specific reforms in a small set of advanced economies. Third, less is known about the effect on interest rate volatility. To extend the literature, I use the Dincer and Eichengreen (2007) transparency index for twenty-four economies of varying income and examine the impact of transparency on both predictability and market volatility. I find that higher transparency improves the accuracy of interest rate forecasts for three months ahead and reduces rate volatility.

Global Liquidity, World Savings Glut and Global Policy Coordination

The global imbalances of the 2000s and the recent global financial crisis are intimately connected. Both originate in the combination of economic policies adopted by the two key economies, the US and China. Global financial markets served as a transmission belt, both during the boom as during the bust. In the US, the interaction among the Fed’s monetary stance, global real interest rates, distorted incentives in credit markets, and financial innovation created the mix of conditions which first drove growth, but then made the US the epicenter of the global financial crisis. Exchange rate and other economic policies followed by emerging markets such as China and the oil-exporting countries contributed to the US ability to borrow cheaply abroad and thereby finance its unsustainable housing bubble during the upswing. But we find that the key drivers of asset prices are global liquidity conditions. Central banks flooded the markets with ample liquidity. Mopping up this excess liquidity will be one major task for central banks worldwide, which needs to be done in a coordinated fashion. Moreover, our analysis has shown that liquidity will first show up in asset price inflation and only later in consumer goods inflation. This renders it difficult for central bank to exit from their current very expansive monetary policy stance if they continue to focus only on price stability.

Aftermath of the Financial Crisis in Russia

The Russian economy has a raw orientation. This fact affects features of financial crisis in Russia. While central banks worldwide decreased refinancing rates, the Bank of Russia, in contrast, increased it. In Russia budgetary expenses increase, despite of set of internal problems. In Russia we both the highest inflation and the deepest economic slump. An increase in retail prices and the some time declined wholesale prices. The rich Russian regions appeared among most suffered from crisis. At the same time the poor regions have not noticed the crisis, as their budgets exist due to grants from the federal budget, and their own revenue are little.

Fed Speak: A Market Microstructure Analysis

Many authors have argued that increased transparency by central banks is likely to improve economic welfare by reducing information asymmetries in financial markets. Accordingly, central banks worldwide have taken steps to release more information related to their policy decisions. Extant empirical studies related to the effects of monetary policy typically examine the relationship between some policy metric and security returns. Such studies, however, do not adequately characterize information asymmetry, or other non-price effects on financial markets associated with central bank announcements. A more direct measure of information asymmetry is the bid-ask spread, especially the adverse selection component of the spread. If FOMC announcements create information asymmetries, then we can discern the sign and magnitude of the effect by analyzing liquidity measures during the announcement window relative to liquidity measures during an appropirate benchmark period. In addition, we use this analysis to assess whether the recent efforts by the FOMC to reduce information asymmetry have been effective.