Central Bank Research Articles

Central Banks as Regulators and (also) Operators of Instant Payments Schemes: Confronting the Criticisms of “Needless Intervention” and “Unfair Competition”

Central Banks as Regulators and (also) Operators of Instant Payments Schemes: Confronting the Criticisms of “Needless Intervention” and “Unfair Competition”

Development of innovationin the Polish banking sector

The rapidly developing market for new technologies is driving the introduction of innovative solutions in the banking sector. As a public trust sector, they are subject to numerous regulations. Supervisors and central banks are trying to support the develop- ment of new technologies in the sector by reducing regulatory uncertainty and support programs aimed at FinTech (Financial Technologies) companies. The purpose of the study is to analyse existing regulations and regulators’ initiatives on new technologies in the banking sector. The author seeks to answer the research question of whether the introduced regulations support or limit the digital transformation of the banking sector in Poland. An im- portant aspect in the sector is customer security, so regulations should focus on protecting the banking customer and ensuring the stability of the sector. They are analysed by regulators so that the relevant regulations enable the introduction of innovative yet safe solutions. The author points out possible synergies resulting from cooperation between banks and FinTech companies. In conclusion, dialogue between banking sector institutions, regulators, central banks and banks leads to the creation of an environment that allows the introduction of innovative solutions while maintaining customer protection and banking sector stability.

Digital payment systems in emerging economies: Lessons from Kenya, India, Brazil, and Peru

Digitalization of retail payments has facilitated financial inclusion. This is recognized to stimulate growth, alleviate poverty, and address gender disparities in the financial sector. This paper closely examines four prominent payment solutions in the developing world, namely M-Pesa in Kenya, UPI in India, Pix in Brazil, and Yape in Peru. These payment systems differ enough in their key characteristics to draw useful lessons from their successful implementation. We employ a descriptive approach based on a three-dimensional conceptual framework that emphasizes the role played by payment service providers, the role played by regulators and central banks, and the degree of payment system interoperability. We then attempt to make this framework operational by suggesting a way to quantitatively represent the four payment systems examined. While these varied experiences demonstrate that there is no one-size-fits-all solution, they highlight the necessity of active public-private sector cooperation and placing the end user at the center of such initiatives.

Regulatory Effects of the Combinations of Aggregate and Structural Monetary Policy Instruments: an application of New Keynesian DSGE model to China

This paper selects Chinese macroeconomic data from the first quarter of 2009 to the first quarter of 2020 and employs a New Keynesian dynamic stochastic general equilibrium model that incorporates the financial accelerator mechanism, price stickiness, and invisible government guarantees. The regulatory effects of different combinations of monetary policy instruments are compared from five perspectives: the shock effect of monetary policy, the magnitude of economic volatility of non-monetary policy shocks, the Central Bank loss function, the gap in the distribution of household income, and the heterogeneous firm external financing premium. Our findings indicate that the regulatory effects of the aggregate price-based and structural quantity-based monetary policy instrument combination are optimal, a conclusion that is further supported by the robustness test. It is therefore recommended that the Central Bank consider the potential benefits of a combined approach to aggregate and structural monetary policy instruments, with a view to enhancing credit availability for the real economy. This paper represents a significant contribution to the field, as it is the first to explicitly propose four distinct monetary policy instrument combinations, thereby overcoming the limitations of previous studies that have focused on a single instrument or a narrow range of instruments. The paper also contributes to the theoretical understanding of monetary policy instruments.

Using Decision Tree Technique to Predict the Financial Collapse of Iraqi Private Banks: An Applied Study

Predicting the Financial Collapse (FC) using modern technologies and scientific methods for Iraqi private banks is considered an early warning to detect their failure in the future. Therefore, these proposals, represented by scientific methods and modern technologies, are submitted to the specialized bodies represented by (the Central Bank of Iraq) in order to present them to the banks in the research sample to raise their capacity through the use of modern technologies and in order to adopt them as a scientific basis for predicting the FC. The following will be followed: Evaluating the performance of banks and classifying them based on the Camels standard (CS) and predicting the FC based on modern technologies (by relying on the decision tree algorithm). The research relied on the deductive approach to complete the theoretical aspect and the applied (experimental) approach to complete the practical aspect. The researcher also processed and prepared the data and then evaluated the performance of banks and classified them based on the CS equations consisting of five indicators and on the averages of these results as inputs for prediction using DT. Different computer programs were also adopted, as the Excel program was used to unload the data, the (SPSS) program to apply the equations, and the (Matlab) program to predict modern technologies. The most prominent conclusions reached by the research are as follows: Modern technologies represented by decision trees are characterized by providing more accurate information

Treasury Bill Investment and Financial Performance of Tier Three Commercial Banks in Kenya

Purpose: Bank tier categorization is determined by size, complexity, and regulatory requirements, with criteria varying by country and authority (CBK, 2020). Tier 3 banks are the smallest, providing basic services to individuals and small businesses (CBK, 2020). This study investigated the impact of Treasury bill investment on the financial performance of Tier 3 commercial banks in Kenya. Methodology: This study was grounded on the theory of Capital Asset Pricing. The study used secondary data from the Central Bank of Kenya and audited financial statements from 2015 to 2022. Focusing on Return on Assets, the findings aimed to help Tier 3 banks optimize financial performance. Findings: Results showed that investing in treasury bills significantly improved financial performance of tier three commercial banks. Unique Contribution to Theory, Practice and Policy: The study recommended that policy makers should come up with policies that favor allocating more investment capital towards Treasury bill investment so that banks may seize opportunities to optimize their investment strategies and consequently strengthen their overall financial performance in the market.

Wholesale Central Banks Digital Currencies and New Opportunities for Interbank Settlements with the Prospect of Entering International Transactions

A new generation of digital technologies that make it possible to speed up settlements and reduce their cost was born from crypto-currency projects, but the prospects of their economically effective and socially responsible application associate with central bank digital currency. The article discusses the issues of digitalization of central bank money in relation to interbank settlements, including for servicing cross-border payment turnover. So far, this topic has not found a significant response in Russian scientific journals. This publication aims to popularize it by summarizing and analyzing examples extracted from foreign experiments. The advantages of digitalization are compared with the capabilities of conventional payment systems. Descriptions and comparisons of the architectures of the new generation payment system are given, in the range of which it is possible to choose compromises between benefits, risks and costs in the search for the optimal solution. In conclusion, the prospects for the transition to an experiment with digitalization of wholesale payments in Russia are assessed following the upcoming introduction of the “retail” digital ruble

The influence of unconventional monetary policy tools: an euro area perspective

Purpose – This article aims to investigate the influence of unconventional monetary policy tools (UMPTs) employed by the European Central Bank (ECB) on the inflation rate and GDP growth rate within the euro area, motivated by the principles of the Taylor rule. Research methodology – Elastic net regression with ARIMA residuals was used to analyse the relationship between UMPTs and economic indicators, measured by adjusted R-squared. Six samples were constructed, and hypothesis testing was performed using moving block bootstrapping. Residual diagnostics were used for model validation. Findings – The study revealed significant impacts of UMPTs, particularly in combination with interest rates, on inflation rates. However, adjusted R-square values for GDP growth rate were less pronounced, indicating a more complex relationship. Research contributes to understanding the dynamics of monetary policy transmission mechanisms, informing policy institutions, and guiding future research directions. Research limitations – Limitations include the focus on the euro area and the absence of analysis in other major economies. Future research should address these limitations and incorporate additional variables for a more comprehensive analysis. Practical implications – The findings provide insight for policymakers regarding the efficacy of UMPTs in influencing inflation rates, aiding in informed decision-making in monetary policy formulation and implementation. Originality/Value – This study contributes novelty by comprehensively analysing the relationship between UMPTs and economic indicators within the euro area, providing valuable insight into monetary policy institutions, and guiding future research directions.

Central banks, economic statecraft and offshore banking: Comparing financial internationalization strategies in Latvia and Estonia

Small states play a critical role in the operation of the Global Wealth Chains, storing capital assets and funnelling financial flows. However, the knowledge of how such practices of financial transit emerge remains scant. Focussing on the 1990s as the formative decade of post-Soviet capitalism, the article focuses on the variegated financial internationalization in the Baltics, as Latvia developed a vibrant offshore banking sector, whereas Estonia pursued complete Westernization in bank ownership. Challenging the literature that relates the emergence of Baltic offshore finance with right-wing politics, and existing trade and cultural links with Russia, the article argues that the varieties of financial internationalization in the Baltics were due to ‘economic statecraft’ by the Central Banks (CBs). Drawing upon a survey of CB reports, parliamentary speeches, press archives, memoirs, and elite interviews, the article argues that the Baltic CBs’ path-setting decisions shaped the two distinct financial internationalization paths through three interventions: currency reforms, agenda setting, and banking regulation. Drawing on the literature on social embeddedness of CBs, the article attributes the differences in the two CB approaches to their informal alliances with broader society – domestic financiers in Latvia and the government in Estonia.

Taming the Cycles of Finance? Central Banks and the Macro-Prudential Shift in Financial Regulation. By Matthias Thiemann. Cambridge: Cambridge University Press, 2024. 300p. £95.00 cloth.

Taming the Cycles of Finance? Central Banks and the Macro-Prudential Shift in Financial Regulation. By Matthias Thiemann. Cambridge: Cambridge University Press, 2024. 300p. £95.00 cloth.

MINERAL PRODUCTION AND ENVIRONMENTAL POLLUTION IN NIGERIA

This study empirically determined the effect of mineral production on environmental pollution in Nigeria from 1985 to 2022. The research utilised time series data obtained from the Central Bank of Nigeria (CBN) data bulletin and the World Development Indicators (WDI) of the World Bank. The data analysis methodologies utilised include descriptive statistical analysis, ADF Unit Root test, ARDL Bound Co-integration test, and ARDL methodology. The result of the ADF unit root test indicated the presence of a combination of stationary and non-stationary elements. That is a mixture of I(0) and I(1). Furthermore, the ARDL limits co-integration test has shown the presence of a long-term link between the variables. Finally, the ARDL estimation revealed that crude petroleum and natural gas production, likewise mining and quarrying had significant and positive implication on emission of CO2 in both long and short runs. Coal production had positively significant impact on CO2 emission in the long run but positively insignificant impact in the short run. In addition, metal ores positively and insignificantly impacted on CO2 emission in both the long and short runs. The study's results indicated that mineral mining in Nigeria resulted in a rise in environmental contamination. The report proposed that the Nigerian government should thoroughly evaluate and revise current environmental laws and regulations in order to effectively address the environmental consequences of mineral development. This should include establishing clear standards, guidelines, and permits for mining operations, waste management, pollution control, and rehabilitation of mining sites. KEYWORDS: Mineral Production, Environmental Pollution, CO2 Emission

EXTRACTING PRICE SIGNALS FROM THE TERM STRUCTURE OF COMMODITY AND CREDIT MARKETS USING AUSTRIAN BUSINESS CYCLE THEORY

Austrian School economists first explained the significance of interest rates for the structure of production in time. Furthermore, they showed how manipulating the level of interest and the credit supply causes the business cycle (v.Böhm-Bawerk, 1891; v.Hayek, 1938; v.Hayek, 1941 and v.Mises, 1949). More recently, Austrian School economists have elaborated the relationship between the term structure of interest rates and the business cycle (Barnett and Block, 2009; Bagus and Howden, 2010; Bagus et al., 2018; Potuzak and Nemec, 2020; Alonso-Neira and Sanchez-Bayon, 2023). At the same time, market practitioners understand the potency of yield curve inversions as a predictor of future recessions as a result of experience and observation unrelated to Austrian Business Cycle Theory (ABCT). Reference textbooks (Stigum and Crescensi, 2007) explain that capital allocators are pricing in future cuts to the central bank discount rate, thus inverting the yield curve. This ignores the role of free-market price signals in credit, which result from supply and demand fundamentals, and are the link connecting ABCT to term structures.The term structure of commodities markets is also affected by actual or anticipated shortfalls in production over different time horizons. This is widely understood, perhaps because settlement by physical delivery is commonplace and tangible (Hull, 2022). Even though credit and derivatives may at first glance seem more abstract, the same underlying market principles are at work there. The theoretical foundations of and recent work on ABCT provide the necessary tools to analyse both markets through the same lens.

Transformative Dynamics in Private Equity: Exploring Co-investment, ESG Integration and Digitalization Strategies

This paper delves into the evolving landscape of private equity (PE) financing, particularly in the context of the real estate and project development sectors amidst global economic fluctuations and geopolitical uncertainties. With traditional debt financing losing its sheen, the study focuses on the burgeoning role of PE, especially co-investment funds, as a viable financial alternative. Utilizing a rich dataset from reputable sources such as Morningstar, Pitchbook, and the European Central Bank, along with other pertinent studies, the paper presents a nuanced analysis of the declining PE transaction activity in 2023. It highlights how this downturn has catalyzed the adoption of innovative strategies, including the rise of “continuation vehicles” and the increasing significance of co-investments. Moreover, the research offers an insightful examination of the German SME sector, showcasing how PE can be a transformative force. It particularly emphasizes the incorporation of ESG (environmental, social, and governance) considerations and the advancement of digitalization within these enterprises. The study employs a mixed-methods approach, blending qualitative insights with a robust collection of both primary and secondary data. It argues that PE is not merely a financial instrument but a catalyst for meaningful business evolution, enabling German SMEs to effectively respond to current market challenges and undergo essential transformations. This paper aims to contribute to the broader understanding of PE’s role in contemporary business environments, offering valuable perspectives for academics, industry practitioners, and policymakers.

The Public Debt Conundrum: Unpacking Its Effects on Nigeria’s Economic Progress

The study assessed the effect of public debt on economic progress in Nigeria from 1986 to 2022. It investigates the connections among gross domestic product growth rate which is used to measure economic progress, domestic debt, external debt, gross capital formation and exchange rate to throw light on their effect on the path of economic progress of Nigeria. Employing ARDL method, with data sourced from Central Bank of Nigeria Statistical Bulletin and World Bank Development Indicators. Findings reveals that domestic debt and external debt had a positive insignificant short-term effect on Nigeria’s economic progress and both domestic and external debt have an adverse effect on Nigeria’s economic progress in the long term. Also, gross capital formation had an adverse insignificant effect both in the short and long term, exchange rate had a negative insignificant short-term effect, but its long run effect was positive and significant on Nigeria’s economic progress. A long run cointegrating equilibrium relationship was established among the variables in the study. Based on the findings, the study recommends among others that policy makers should manage debt prudently, avoid over reliance on debt as it is only a short-term solution, boost revenue generation and capital formation to drive economic progress and manage exchange rate properly to avoid fluctuations as it has potential to boost Nigeria long-term economic progress.

Developing a Hybrid ARIMA-XGBOOST Model for Analysing Mobile Money Transaction Data in Kenya

This study formulated a hybrid ARIMA-XGBOOST model using the dataset from the Central Bank of Kenya and the objective was to formulate a Hybrid ARIMA-XGBOOST models to capture the patterns and dynamics in Mobile Money Transactions in Kenya. The study was motivated by the gaps that existed from the previous studies which lacked the ability to model both linear and non-linear trends in the data across time period. Since 2007 when Mpesa was invented, the rate of Mobile Money transactions has rose steadily and this required a complex model that will provide a clear trend. To accurately model the dynamics of Mobile Money Transactions in Kenya, this study presented a complex Hybrid model. The model was formulated by combining Autoregressive Integrated Moving Averages (ARIMA) and Extreme Gradient Boosting (XGBOOST). The ARIMA captures the linear trends of the data while the XGBOOST models the non-linear part and trained to model the ARIMA residuals. The model parameters were evaluated using Mean Absolute Error, Root Mean Square Error among others and confirmed to be accurate and reliable. Based on the findings from the ADF coefficient, the stationary condition was met (P-value=0.01), and therefore we proceeded to develop the ARIMA models. Initial diagnoses included model identification and examination of autocorrelation to determine the ARIMA configurations, whereas the Box-Jenkins test confirmed the models' adequacy (P-value=2.220e-16). Based on Mean Absolute Error (MAE), Root Mean Square Error (RMSE), Mean Absolute Percentage Error (MAPE), and Mean Percentage Error (MPE), which are all below 1 percent, indicates that the performance of the models had high prediction accuracy.

Exploring the Relationships Between Democracy and Central Bank Independence:

Exploring the Relationships Between Democracy and Central Bank Independence:

Predicting the Law: Artificial Intelligence Findings from the IMF’s Central Bank Legislation Database

Predicting the Law: Artificial Intelligence Findings from the IMF’s Central Bank Legislation Database

Best Before? Expiring Central Bank Digital Currency and Loss Recovery

AbstractPhysical cash enables payments in the absence of electricity or network coverage. Such offline payment functionality promotes the operational resilience and, particularly in developing countries, the accessibility of payments. Central banks are exploring issuing digital cash substitutes with similar offline payment functionality. Such substitutes could incorporate novel features, making them more desirable than physical cash. This paper considers automating personal loss recovery for offline digital currency balances through the introduction of an expiry date. Our results show this functionality could have a substantial positive impact on consumer demand for offline digital currency balances. We find an asymmetric impact on welfare of adjustments to the expiry date: small increases from the optimum cause little damage, but small decreases from the optimal expiry date can have a large negative impact. More information‐sharing between user devices and the central bank can improve loss recovery but has an ambiguous impact on social welfare.

Research and Enlightenment of Purchasing Power Parity Test

Purchasing Power Parity (PPP) is the cornerstone of many theoretical models in international finance. The PPP test is of great importance to market participants, central banks and policy makers. This paper reviews the relevant literature on the validity test of PPP in recent years: involving micro and macro directions, which are embodied in four aspects: empirical, model, exchange rate and evaluation. Although the research and application of PPP test have made great progress, there are still some problems and challenges. With the continuous development of the global economy and the improvement of data availability, the future research on PPP test will be more in-depth and comprehensive.

Bagehot and the stabilising function of central banks

The analysis of Lombard Street focuses on two dimensions that have received little attention: (1) Bagehot’s analysis of the systemic financial interdependencies between the functional poles of creditors and debtors in financial markets; and (2) the significance of trust and expectations in the functioning of these promise-to-pay markets. These dimensions lead us to Bagehot’s well-known principles of central bank responsibility in the historical legislative-political context of the Bank Charter Act of 1844. Despite its publication 150 years ago, this book deals with the then new and still relevant finance-based interdependencies where functional roles need to be redefined and restructured.