Choice Of Currency Research Articles

BRICS Alliance: A SWOT Analysis and the Potential Implications for Ending the Dominance of the USD

The group known as BRICS, comprising Brazil, Russia, India, China, and South Africa, came into being when its members decided to join hands to challenge the economic and political power of the wealthier nations of North America and Western Europe and expanded as BRICS+ when Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates entered the alliance with the same goals. Among the main reasons that led to the formation of the bloc was to put an end to the global dominance of the United States dollar (USD). Today, the BRICS+ bloc is motivated more than ever to find a solution to the ever-growing sanctions imposed by the United States (U.S.) on its member states as well as to cope with the fluctuating market situations that are merely based on the USD. The effectiveness of the newly expanded bloc’s alliance is the need of the hour, and for this purpose, the current study conducted a SWOT analysis to evaluate the bloc’s strengths, weaknesses, opportunities, and threats. The study took the facts and figures associated with the BRICS member states and their dealings with the U.S. and tried to analyze the effectiveness of this bloc should its members decide to conduct business with each other in a common currency. Furthermore, the study also evaluated the reasons behind the concept of de-dollarization and the benefits it offers the member states of the BRICS bloc. Additionally, the study proposes essential recommendations, such as the formulation of necessary measures to deal with potential disagreements that may arise regarding the choice of a common currency that should be used for trade among the member countries. Such an application of the study is an entirely novel application in the current area of research with the potential to open new horizons for future research considering the new targets of the BRICS+ group.

Parallel Currencies under Free Floating Exchange Rates: A Model Setting Out the Conditions for Stable Currency Competition

We use a theoretical model to set up the conditions for a country to attain monetary stability by allowing for two freely tradable currencies to circulate in parallel. For this parallel system to function properly, confidence in the good behavior of the monetary authorities in charge of the two currencies is key. Our model shows how a floating exchange rate between the two can keep the issuers of the local currency in check. The results from our model show the conditions under which a parallel currency system disciplines the issuers of the currencies and thus maintains their purchasing power. In non-volatile economies, it also discourages governments (or private issuers) from inflating one of the currencies as a means to raise seigniorage, as this policy results in the displacement of the currency from the market. When foreign payments shortfall—such as in Greece and Cyprus during the ‘euro crisis’ in the mid-2010s, or intractable hyperinflation—leave the country without a medium of exchange, our model shows how currency choice can restore monetary circulation and offer a path to achieving and maintaining monetary stability.

The Impact of the Measure Used to Calculate the Distance between Exchange Rate Time Series on the Topological Structure of the Currency Network.

Structural properties of the currency market were examined with the use of topological networks. Relationships between currencies were analyzed by constructing minimal spanning trees (MSTs). The dissimilarities between time series of currency returns were measured in various ways: by applying Euclidean distance, Pearson's linear correlation coefficient, Spearman's rank correlation coefficient, Kendall's coefficient, partial correlation, dynamic time warping measure, and Kullback-Leibler relative entropy. For the constructed MSTs, their topological characteristics were analyzed and conclusions were drawn regarding the influence of the dissimilarity measure used. It turned out that the strength of most types of correlations was highly dependent on the choice of the numeraire currency, while partial correlations were invariant in this respect. It can be stated that a network built on the basis of partial correlations provides a more adequate illustration of pairwise relationships in the foreign exchange market. The data for quotations of 37 of the most important world currencies and four precious metals in the period from 1 January 2019 to 31 December 2022 were used. The outbreak of the COVID-19 pandemic in 2020 and Russia's invasion of Ukraine in 2022 triggered changes in the topology of the currency network. As a result of these crises, the average distances between tree nodes decreased and the centralization of graphs increased. Our results confirm that currencies are often pegged to other currencies due to countries' geographic locations and economic ties. The detected structures can be useful in descriptions of the currency market, can help in constructing a stable portfolio of the foreign exchange rates, and can be a valuable tool in searching for economic factors influencing specific groups of countries.

Network effect and international currency

AbstractThe network effect is an important factor for the inertia and path dependence in the international monetary system. In this paper, we explore its influence, both theoretically and empirically: (a) by extending the standard monetary search model to a three‐country three‐currency model with multiple transitions to clarify the network effect on currency choices; (b) by showing empirically that the network effect is positive, statistically significant, and quantitatively comparable with other factors, such as trade share. The empirical results hold both for major international currencies and emerging currencies, such as RMB, and for various estimation specifications and subsamples.

СЕЛЕКТИВНІ РИЗИКИ ВКЛАДНИКІВ ВІТЧИЗНЯНИХ БАНКІВ В УМОВАХ ВОЄННОГО СТАНУ

The article examines the essence and types of selective risks of bank depositors and their features in the conditions of martial state. The main types of selective risks of bank depositors are characterized. The expediency of improving the determination of the rating of banks when determining the risk of incorrect bank selection is substantiated. An approach to improving the determination of the rating of financial stability of banks by normalizing financial indicators taking into account their normative values is proposed. It has been established that an important factor in the depositor's determination of the bank's reliability in nowadays conditions is the level of its technologies. The essence of the risk of incorrect choice of the deposit currency by the depositor is determined and a method of its assessment based on the application of Value at Risk measurement technology is proposed. It has been established that the main source of risk of incorrect choice of deposit currency by the depositor is the level of devaluation or revaluation of the national currency during the deposit period. The expediency of using Value at Risk technology to assess this risk is substantiated. It has been established that in the conditions of martial state and increased turbulence of the foreign exchange market, it is advisable to assess the risk of incorrect choice of the deposit currency taking into account both the volatility and the trends in the exchange rates. The essence of the risk of the wrong choice of the term of the deposit is determined and the complexity of its assessment in the conditions of martial state is substantiated. Attention is focused on the importance of effectively managing the risk of the wrong choice of the type of deposit in the conditions of martial state by forming a so-called financial security cushion in the form of placing a certain amount of funds on demand deposits or time deposits with the right of early withdrawal. The necessity of developing a strategy for forming the optimal portfolio of a bank depositor in the conditions of martial state is substantiated, which can become the subject of further scientific researches.

The Topological Structure of the Global Foreign Exchange Market During Crises – Comparative Network Analysis

Purpose – The aim of this article was to assess the changes in the topological structure of the currency market caused by two crises: the COVID-19 pandemic in 2020 and Russia’s aggression against Ukraine in 2022. A network of major world currencies was analysed over three six-month sub-periods: the pandemic period 1.02–31.07.2020, the war period 1.02–31.07.2022 and the reference period 1.02–31.07.2021. Research method – We have used the dynamic time warping (DTW) method for comparing time series. DTW distances between pairs of individual currencies were calculated, and, based on them, minimum spanning trees (MST) were constructed, whose topological characteristics were analysed. Results – It turned out that the topological structure of the foreign exchange market varies in the sub-periods studied, and the analysed crises affected the currency network. In addition, the networks generated by the MST depend on the choice of base currency used to measure the value of all other currencies. Originality / value / implications / recommendations – The significance of the results obtained lies in providing a description of the topological structure of the market during the observed crises. The detected hierarchical structures can be useful in theoretical descriptions of currencies and in the search for economic factors affecting specific groups of countries.

Determinants of Currency Choice in Cross-Border Bank Loans

Determinants of Currency Choice in Cross-Border Bank Loans

Challenges in promoting local currency corporate bonds in Asia: Evidence from international business relationships

In Asia, in contrast to government bond markets where reliance on foreign currency bonds has diminished after proactive policy initiatives, the corporate sector still has a large share of foreign currency bond outstanding. We analyse this phenomenon by examining the driving factors behind Asian corporate bonds’ currency choice (local currencies versus US dollar). Our results suggest that, although the successful market developments reduced barriers for Asian firms to issue in local currencies, such constructive effect was inevitably limited by firms’ FX exposures induced by Asian firms’ rapid involvement in international business during the same period. In addition, US dollar bond issuances in the region are more associated with FX funding needs from the expenditure side rather than natural hedging against FX revenue, implying that the problem of currency mismatch likely still exist among Asian firms. As such, Asian policymakers should devote more attention to firms with more cross-border payments when scrutinising the corporate sector’s financial vulnerability. They should also continue fostering the development of local currency bond markets and spur the use of local currencies in invoicing regional business transactions.

The Impact of Dollarization on Consumption and Savings Behavior in Dili Timor-Leste (Case Study: Permanent Civil Servants)

Dollarization is adopting the U.S. dollar as the currency of choice in a foreign country. A small nominal value of the dollar pushed the price in the market becomes more expensive. Coupled with the community of Dili, Timor-Leste that the behavior of consumption is very high because it always gives more priority to their culture. Saving behavior of Timorese people affect by three factors: the low price (using U.S dollar), income and culture. Therefore, this research aims to identified the effect of dollarization on consumption behavior and saving behavior of permanent civil servants in Dili, Timor-Leste. We use 315 samples in our research and the data collection through questionnaires. SMART-PLS 3.0 was used to test hypothesis. The result showed that dollarization has the positive and significant effect on the consumption behavior of permanent civil servants in Dili, Timor-Leste. Therefore, dollarization has positive and significant effect on saving behavior of permanent civil servants in Dili, Timor-Leste.

A parsimonious model of trade, finance and endogenous currency choices in international reserves

We provide a parsimonious model with two international currencies (dollar and quasi-dollar) to examine the endogenous linkage among trade invoicing, bank funding and optimal currency choices in central banks’ international reserves. We find that (1) when the exchange rate volatility is high, an increase in dollar debt share would lead central banks to hold a larger dollar share in international reserves; (2) when exchange rates of dollar and quasi-dollar move in the same direction, they tend to cut dollar share in reserve holdings. We test these predictions using a newly-available foreign exchange reserve currency composition dataset and find considerable support.

Factors influencing the choice of the invoicing currency in international trade: Panel data analysis for 55 countries

Research background: Most transactions in world trade are invoiced in several international currencies. The changes in the distribution of the great economic powers and the strengthening of the position of developing countries make it necessary to consider the factors determining the choice of trade invoicing currency and to assess the prospects of the dollar as an invoicing currency and the possibility of strengthening the position of developing countries' currencies in this function. Purpose of the article: The aim of the paper is to assess the factors influencing the choice of invoicing currency for international trade in 2000?2019. Methods: The analysis of factors influencing the choice of international trade invoicing currency is based on panel data modelling. The study is conducted for a group of 55 countries. It is assumed that the following variables may influence the currency position in the trade invoicing function: the share of the issuer's country in the bilateral trade, inflation and exchange rate. Findings & value added: The analysis showed that despite the decreasing share of the United States in world trade, the U.S. dollar remains the most important export invoicing currency. The main factors influencing the dollar's dominance are the U.S. share of countries' exports, inflation in developing countries, and the exchange rate in advanced economies. The great significance of trade share as a determinant of the position of the trade invoicing currency is an important indication of the strengthening position of developing country currencies, particularly the Chinese yuan. The obtained results confirm, with the use of more complete data, the validity of the dominant currency paradigm and enrich the still underdeveloped analysis in the area of international macroeconomics using panel data analysis.

A Nonlinear Industry-Level Analysis of China’s Trade Balances with the EU-28: Does the Utilization of the Vehicle Currency USD Matter?

As the USD is the globally dominant vehicle currency, the exchange rate USD/CNY can affect China’s trade balances with not only the US but also other partners. Nevertheless, most of the existing studies overlook its role when analyzing China’s trade balances with non-US partners. This common drawback conceals the possible effects of currency choice for invoicing the exported and imported merchandise. Moreover, the proportion of invoicing currencies can vary from industry to industry, which implies the distinctive patterns in China’s exchange rate-trade balance nexus at industry level. Motivated by the facts that China and the EU are now the largest trading partners of each other, and they substantially use the vehicle currency USD, this paper is the first to examine the nonlinear impacts of USD/CNY on China’s trade balances with the EU-28 at industry level, which minimizes aggregation bias and reveals more detailed and helpful findings for policy-makers. The empirical results indicate that the responses of China’s trade balances in each industry are contingent on the choice of invoicing currencies. And the depreciation of CNY against the vehicle currency USD cannot stimulate China’s trade balances.

Competition between Variable–Supply and Fixed–Supply Currencies

For one variable–supply currency in isolation, one player’s Cobb–Douglas utility depends on the current supply divided by the initial supply, multiplied by the inverse of the accumulative inflation/deflation. With equal weight assigned to both factors, money printing outweighs inflation, and money withdrawal outweighs deflation. The study design is to analyze how competition between one variable–supply and one fixed–supply currency impacts the player’s choice of currency. Applying the 1959–2021 US M2 money supply data and the 1635–2021 US inflation data, the player’s utility increases over time when assigning high weight to money printing/withdrawal and increases less or decreases overall when assigning high weight to inflation/deflation. With different player support for the two currencies, depending on each currency’s backing, convenience, confidentiality, transaction efficiency, financial stability, and security, replicator dynamics is used to determine the player’s volume fraction of transactions in each currency. Low, high, increasing, and decreasing support of a currency are analyzed. Each fraction may increase, decrease, be inverse U–shaped, U–shaped, and approach low or high levels over time. For example, high weight assigned to money printing may cause the player to eventually prefer the variable–supply currency unless the player supports the fixed–supply currency highly and increasingly.

Invoicing Currency and Financial Hedging

AbstractWe examine the link between exporters' currency choices and their use of financial hedging instruments. Large firms are more likely to use hedging instruments, especially those pricing in a foreign currency. We provide suggestive evidence that access to hedging instruments increases the probability of pricing in a foreign currency. A model of invoicing currency choice augmented with hedging can rationalize these facts. In the model, large firms that would have chosen to price in their own currency in the absence of hedging instruments can decide to set prices in a foreign currency if they have access to such instruments.

An Equilibrium Model of the International Price System

What explains the central role of the dollar in world trade? Will the US currency retain its dominant status in the future? This paper develops a quantitative general equilibrium framework with endogenous currency choice that can address these questions. Complementarities in price setting and input-output linkages across firms generate complementarities in currency choice making exporters coordinate on the same currency of invoicing. The dollar is more likely to play this role because of the large size of the US economy, a widespread peg to the dollar, and the history dependence in currency choice. Calibrated using the world input-output tables and exchange rate moments, the model can successfully replicate the key empirical facts about the use of currencies at the global level, across countries, and over time. According to the counterfactual analysis, the peg to the dollar in other economies ensures that the US currency is unlikely to lose its global status because of the falling US share in the world economy, but can be replaced by the renminbi in case of a negative shock in the US economy. If the peg is abandoned, the world is likely to move to a new equilibrium with multiple regional currencies. (JEL D21, E31, E42, F14, F31, F33)

Network‐adjusted market share and the currency denomination of trade

AbstractThe currency denomination of trade has been shown in many recent contributions to have far‐reaching effects on different macroeconomic phenomena, such as inflation and the international transmission of nominal shocks. In this work, we apply a novel index of bargaining power, which incorporates the network dimension of trade and brings fresh evidence as to the relevance of network‐related features (and implied bargaining power) in the choice of invoicing currency, which has received relatively little attention in the empirical literature, so far. By using a highly disaggregated, almost transaction level, data set of Italian imports and exports, we contribute to the existing empirical literature by documenting a very significant impact of trade network asymmetries, captured by our adjusted index of market share, on the choice of an invoice currency.

Dominant Currencies: How Firms Choose Currency Invoicing and Why it Matters

Abstract We analyze how firms choose the currency of invoicing and the implications of this choice for exchange rate pass-through into export prices and quantities. Using a new data set for Belgian firms, we find currency invoicing to be an active firm-level decision, shaped by the firm’s size, exposure to imported inputs, and the currency choices of its competitors. Our results show that a firm’s currency choice, in turn, has a direct causal effect on the exchange rate pass-through into prices and quantities. Moreover, the differential price response of similar firms that invoice in different currencies is large, persists beyond a one-year horizon, and gradually wanes in the long run. This results in allocative expenditure-switching effects on export quantities, which build up over time, suggesting a role for quantity adjustment frictions in addition to price stickiness. Our findings shed light on the mechanisms that make or break a dominant currency and the consequences it has for the international transmission of shocks.

THE CURRENCY CONUNDRUM FOR AN INDEPENDENT SCOTLAND

AbstractIn this paper we revisit the issue of currency regime choice for an independent Scotland using an international macroeconomic/ finance framework. Specifically, we consider the main competing proposals for currency choice with an emphasis on the SNP’s official policy of the informal use of sterling post-independence. We conclude that from a macroeconomic perspective this option is unlikley to be credible to international capital markets. The option that would be credible, and avoids the austerity associated with the choice of a fixed exchange rate option, would be a free float at least during the transition period of independence.

The impact of foreign economic sanctions on commercial contracts

Foreign economic sanctions were in the focus of domestic lawyers’ attention for half a dozen years. The new legal regime for persons directly or indirectly involved in sanctioned cross-border commercial activities has been studied in science mainly in the context of public law, and — in the applied aspect — through the prism of compliance procedures. However, no less important is the problem of sanctions regulation in its embodiment in the private law instruments of contract law. The purpose of the study is to summarize and analyze the effectiveness of the accumulated practice of the use of pre-contractual and contractual mechanisms to manage the risks caused by foreign restrictive measures. To achieve the goal, general scientific methods of analysis, synthesis, generalization, as well as the comparative legal method and approaches of economic and empirical analysis of law are used. Following the presentation of the leading approaches of the Russian state courts to the legal qualification of economic sanctions, the most promising options to manage the risks of sanctions for business at the pre-contractual and contractual stages are studied. In line with best business practices, pre-contractual mechanisms of compliance procedures (external and internal compliance) as well as contractual ways to mitigate sanctions risks proved to be the most effective for alleviation of the sanctions burden. Both sets of measures are developed and introduced into the daily routine by business participants themselves. Contractual regulation makes a decisive contribution to reducing the degree of negative legal consequences for business. To effectively manage risk, representatives of the business community use a wide range of contractual provisions: sanctions clauses, force majeure clauses, currency choice clauses, applicable law clauses and arbitration clauses. The success of such contractual initiatives, strengthened by the development of standard forms and terms of commercial contracts, is confirmed by judicial and business practice.

Currency Choice in Contracts

Abstract We study the interaction between the currency choice of private domestic contracts and optimal monetary policy. The optimal currency choice depends on the price risk of each currency, as well as on the covariance of its price and the relative consumption needs of the agents signing the contract. When a larger share of contracts is denominated in local currency, the government can use inflation more effectively to either redistribute resources or reduce default costs, which makes local currency more attractive for private contracts. When governments lack commitment, competitive equilibria can be constrained inefficient, thus providing a reason to regulate the currency choice of private contracts. We show that both the equilibrium use of local currency and the implications for regulation depend on the level of domestic policy risk. Our model can explain the wide use of the US dollar in international trade contracts and the observed hysteresis in dollarization.