Euro Research Articles

Black Market Exchange Rate, Currency Substitution and Demand for Money

Strict control on foreign exchange and successive devaluation of domestic currency adopted by Algerian government for nearly four decades resulted in black market for foreign currencies, high inflation rates and consequently, lost of confidence in Algarian dinar as a unit of account and store of value. The aforementioned results have given rise to the phenomenon of currency substitution.The aim of this paper is to provide evidence of the existence of currency substitution in Algeria. Using time series data covering the period 1990-2021 and an autoregressive distributive lag (ARDL) model combined with CUSUM and CUSUMQ, the demand for money in Algeria is estimated. Our results point out to the existence of currency substitution when the black market exchange rate is incorporated in the money demand equation. Our findings contribute to the existing litterature on currency substitution issue. As far as policy makers are concerned, the existence of CS could hinder the effectiveness of stabilization policies and thus, means of reducing currency substitution should be devoted.

Short considerations regarding the Romanian deposit return system : “How imperfect but perfectible” the system really is now?!

On 30 November 2023, a historic moment in Romania was marked, being officially launched the Deposit Return System (DRS - called in Romanian `sistemul de garantie returnare` and abbreviated `SGR`). This represents a huge step towards a greener and a more sustainable future of Romania. The deposit return system is an important component of the circular economy, and through this implementation, Romania must attain the recycling objectives of the European Union and to be clean. On short, through this deposit return system, consumers and end-users will pay a guarantee of 0.50 RON (i.e. ten euro cents) when they purchase from a retailer any product from certain categories of beverages (i.e. water, soft drinks, beer, cider, wine or spirits), in primary non-refillable glass, plastic or metal packaging, with volumes between 0.1 l and 3 l inclusive. For the ease of identification, the products included in the DRS are marked with the packaging with guarantee symbol, as shown below. In this study we want to present the main legal provisions applicable to DRS, what is the current status of the DRS implementation in Romania, after less than two months of application, and the visible challenges of this system. But several questions appear in our mind? How is intended the DRS to work? Was Romania ready, on 30 November 2023, for the operation of the DRS, especially that it is supposed to collect more than 7 billion recipients at the national level? Did Romania manage to put in place a functioning operating system? Were all stakeholders involved in the DRS ready to take their positions in the system? All of these questions will be answered in this present study.

Multi-central bank digital currencies arrangements: a multivocal literature review

PurposeThe present study aims to systematically synthesize the academic and industrial literature on multi-central bank digital currencies (m-CBDCs) arrangements.Design/methodology/approachThe study adopted a unique multivocal literature review methodology that considers both white and grey literature. For white literature searches, the study relied on Scopus, Web of Science (WOS), and Google Scholar bibliometric databases; for grey literature searches, the study used the Google search engine.FindingsThe findings of the study illustrated that M-CBDC arrangements, through various design options, have the potential to revolutionize the contemporary international payment system. M-CBDC arrangements will lead to more integrated financial systems and promote economic growth. However, m-CBDC arrangements will also have serious macroeconomic implications, such as contagion and currency substitution risks.Research limitations/implicationsThe present review is one of the earliest reviews of m-CBDC arrangements. In addition, the findings of the study offer valuable insights for both academicians and policymakers.Originality/valueThe study is also one of the pioneer studies in management studies that apply a multivocal literature review methodology.

Technology and monetary sovereignty: Understanding motivations for central bank digital currencies

Central bank digital currency (CBDC) projects have advanced the furthest in small or developing economies. In contrast, central banks in wealthy countries where technologies that fuelled this trend developed are holding back on such plans. What explains this divergence? I argue that CBDCs are attractive to states which see them as useful to increase and reinforce sovereignty over economic territory. They have thus been adopted in states with high currency substitution, large informal economies, or limited reach of the banking system. For similar reasons, wealthier states see less need for CBDCs. This paper contributes to understanding the impacts of digital money on the spatial dynamics of monetary politics.

A microfounded approach to currency substitution and government policy

This paper develops a search-theoretic, two-country, dual-currency model featuring endogenous currency substitution with costly authentication of foreign currency. Benevolent governments, unable to commit to future policies, determine fiscal and monetary policy weighing distortion-smoothing and time-consistency. Decisions of the fiscal authority are accommodated by the monetary authority, where public expenditures, public debt, labor taxation, and inflation are determined using the notion of a Markov-perfect equilibrium. Inflation differentials arise endogenously from cross-country heterogeneities in the citizens' valuation of public goods, rendering international differences in fiscal imbalances the root cause for currency substitution. A steady-state analysis characterizes long-run allocations and identifies the domestic and foreign governments' best responses to changes in local payment patterns. Historical data supports the theoretical findings and provides empirical evidence for the positive relationship between currency-substitution ratios, inflation, and public debt. An extension studying de jure dollarization shows that time-consistency concerns disappear once currency substitution is imposed exogenously, reducing the government's objective to distortion-smoothing exclusively.

Investigating Statistical Features of the FX Bid Ask Series in a Small Economy with a Sizeable Informal Economy

The assessment of the effect of the informal use of a foreign currency on the corresponding FX rates toward the national currency is a very difficult task, requiring direct calculation and modeling. It comes mostly because of the unknown quantity of foreign money used in the informal sector, but also because of the lack of quantitative calculation models. To overcome this gap and to realize a qualitative description of this effect in a concrete economic environment, we propose herein a comparative analysis between the behavior of two typical FX rate series recorded in the Albanian currency market, the Euro-ALL and USD-ALL, providing that the Euro is used commonly as a national currency substitute in the informal economy and the USD is not. So, we have evidenced that the un-stationarity degree of the Bid and Ask spread distribution for the Euro-ALL FX series is higher than for the corresponding USD-ALL case, but with a lower variance. Those features occurring simultaneously can be explained by assuming that informal use of the Euro acts as an additional perturbation on the FX system, imposing high nonstationary, but at the same time it provides reservoir or source features for the money disbalances, reducing the average fluctuations. Next, the depth of the market measured by the average Bid-Ask Spread has resulted in a smaller price for the Euro currency, indicating a lower cost of the transactions and reinforcing the assumption regarding the distribution’s in-stationarity features. Based on those indicatory findings, we propose to realize indirect evidence for our assumptions by comparing the reproduction of the corresponding distribution using autoregressive models. In this case, we have evidenced that the distribution of the FX Euro-ALL spread can be reproduced better if we include in standard ARCHX (m, n, p) models a term that mimics the informality measure. When applying the same procedure for the USD-ALL spread, the resulting distribution has not matched equally well with the original ones. Those findings have been discussed in the framework of an alternative description of the effect of the informal use of foreign currency in a small economy with a sizeable informal sector, which convene our current system under analysis, but we believe that they can be applicable for similar economic environments. Doi: 10.28991/HEF-2024-05-01-02 Full Text: PDF

Croatia’s Uneasy First Decade in the European Union

Croatia celebrated a decade of membership in the European Union by joining the euro currency and the Schengen Area of free movement on January 1, 2023. At the same time, however, the country is struggling with the economic, social, and political consequences of its semi-peripheral status. A series of reform challenges remain unsolved, including the continued dominance of clientelistic networks. Amid a set of overlapping crises, from the global financial meltdown to the COVID-19 pandemic, the country has seen a revival of conservative and patriarchal ideologies.

External costs of electricity generation in 27 European countries from 2010-2030: Pathway toward sustainability or business as usual?

Electricity generation in Europe is undergoing a fundamental change. The aim is to increase sustainability by reducing emissions. Each country has a different electricity mix, and there is no established method for measuring environmental impacts of electricity production with a single monetary indicator, in a uniform manner, and with country-specific data. To address this gap, a model that measures the costs of 19 environmental externalities (usually, types of emissions) has been developed. Using country-specific technologies, electricity mixes, and external cost rates, the development of external costs of generating electricity in 27 European countries between 2010 and 2030 is assessed and analyzed. The simulation results show that the external costs vary heavily between 2.1 and 22.4 euro cents per kWh in this period. Despite the initiated transformation of the energy systems in many EU countries, external costs per kWh are decreasing in only eight of them. This fact underlines the need for a drastic change in national energy strategies. Overall, the results show that more far-reaching policy measures are needed in order to significantly reduce the external costs of the energy sector in Europe. The article raises the level of granularity of research on the external costs of electricity in Europe by combining extensive country-specific emission data and country-specific external cost rates.

The Effect of Policy Uncertainty on Money Demand in CEMAC Countries

The aim of this paper is to investigate the long run effect of policy uncertainty on money demand for Central African Economic and Monetary Community (CEMAC) countries over the period 1985-2017. We consider a more inclusive measure of policy uncertainty that encompass uncertainty related to economic and political events. Our measure of policy uncertainty is taken from the World Uncertainty Index (WUI) developed by the Policy Uncertainty Group. To estimate the money demand function, we employs panel data estimators that address issues of cross-sectional dependence and parameter heterogeneity. The estimates establish evidence of the long-run relationship between money demand and its determinants. It appears that the demand for domestic money increases with real income meanwhile decreases with the inflation rate. And so, the opportunity cost of holding money is reflected in the rate of inflation. The results associated to the exchange rate show that currency substitution does not hold in the long-run for the sample considered. The most important result is that policy uncertainty has an adverse long-term effect on money demand for CEMAC countries. Our results are robust to alternative panel estimation approaches. Thus, increased uncertainty leads people to hold less cash, while decreased uncertainty leads them to hold more cash.

An empirical analysis of the dynamic impact of DeFi on GCC foreign exchange forward markets: portfolio implication

PurposeThis paper aims to investigate the conditional equicorrelation and cross-quantile dependence between the DeFi, European and GCC currency markets (Oman, Qatar, Bahrain, Kuwait, Saudi Arabia and the United Arab Emirates).Design/methodology/approachThis study applies the GARCH-DECO model and cross-quantilogram framework.FindingsThe findings reveal evidence of weak and negative average equicorrelations between the examined markets through time, excluding the COVID-19 outbreak and Russia–Ukraine conflict, which is consistent with the literature examining relationships in different markets. From the cross-quantilogram model, the authors note that the dependence between DeFi, EURO and GCC foreign exchange rate markets is greatest in the short run and diminishes over the medium- and long-term horizons, indicating rapid information processing between the markets under consideration, as most innovations are transmitted in the short term.Practical implicationsFor the pairs of DeFi and currency markets, the static and dynamic optimal weights and hedging ratios are also estimated, providing new empirical data for portfolio managers and investors.Originality/valueTo the best of the authors’ knowledge, this is one of the most important research looking into the conditional correlation and predictability between the DeFi, EURO and GCC foreign exchange markets. More importantly, this study provides the first empirical proof of the safe-haven, hedging and diversification qualities of DeFi, EURO and GCC currencies, and this work also covers the COVID-19 pandemic and the Russia–Ukraine war with the use of a single dynamic measure produced by the GARCH-DECO model. In addition, the directional predictability between variables under consideration using the cross-quantilogram model is examined, which can be capable of capturing the asymmetry in the quantile dependent structure. The findings are helpful for both policymakers and investors in improving their trading selections and strategies for risk management in different market conditions.

The monetary policy trilemma from the perspective of European integration

AbstractFollowing the breakdown of the Bretton Woods agreement the international monetary system has operated based on floating exchange rate arrangements and free capital mobility. A most significant subsequent improvement has been the process of European monetary integration, from the institution of the European Monetary System to the Euro currency. The relationships between the short‐term interest rates of European Union (EU) countries and the United States suggest, that in the post‐Bretton Woods period the US dollar has held an important anchor currency role, while EU countries acquired considerable monetary policy independence. Further, the stronger relationships between the short‐term interest rates of EU countries and Germany may be viewed as a consequence of monetary unification. The econometric evidence provides important insights for the period following the adoption of the Euro, when European economies have in many instances been subject to heterogeneous shocks.

Business cycle synchronization and its determinants in the OECD countries: panel data evidence

ABSTRACT The primary determinants of business cycle synchronization among OECD countries and their interactions are examined using panel Granger causality tests, single-equation panel regressions, simultaneous equations model error component three-stage least squares (EC3SLS), and cross-sectional 3SLS econometric techniques. The sample spans the years 1990 through 2021. The results demonstrate the direct and indirect effects of the key macroeconomic variables on the synchronization of the business cycles of the sample economies, as well as the complementary and competing nature of these variables. The magnitude and significance of these macroeconomic factors in relation to the business cycle synchronization before and after the global financial crisis of 2009 are also examined in this study. Furthermore, the analysis supports the ex-post argument for entering the euro currency union. The study article contributes by providing direction for future empirical research on the sources and propagation mechanisms of international business cycle transmission.

Empirical Study on Dollarization in Vietnam

The research is aimed at investigating the facts and determinants of dollarization in Vietnam in the period of 2010-2019. Additionally, the monetary policies implemented by the government and the State Bank of Vietnam are assessed to find their contribution to the success of de-dollarizing in Vietnam. The empirical test is carried out with 120 observations using OLS model. Key findings are: (i) inflation, exchange rate and USD deposit rate have positive impacts on the dollarization in Vietnam; (ii) consumer price index has negative impact on the dollarization; (iii) the two variables of imports and foreign direct investment are not significant, which is different from other previous studies. This may come from the fact that Vietnam is very active in importing and attracting foreign investment, and external investors do not worry about dollarization situation in Vietnam. Some recommendations to the Government and the State Bank of Vietnam are proposed to reduce dollarization in Vietnam to strengthen the reputation and belief on Vietnam dong. Keywords: Asset substitution, Currency substitution, Devaluation, Dollarization, Vietnam

Convolutional Neural Network – Based Algorithm for Currency Exchange Rate Prediction

The foreign exchange market is one of the complex monetary markets in the world. Each day trillions of dollars are traded in the FOREX market by banks, retail traders, corporations, and individuals. It is very challenging to predict the price in advance due to the complex, volatile and high fluctuation. Investors and traders are constantly searching for innovative ways to outperform the market and increase their profits. As an outcome, forecasting models are continually being developed by scholars around the globe to accurately predict the characteristics of this nascent market. This study intends to apply the Random Forest (RF) approach to Convolutional Neural Networks, which involves two key steps. The first step is starting with feature selection using Convolutional neural network.The attention layer is then employed to assign weight.The random forest strategy is designed in the second stage to generate high-quality feature subsets. Thus the better result generated by CNN-RF model. Actually, this strategy combines the advantages of two different strategies to produce an outcome that is more consistent with what exchange market decision-makers anticipate happening in the exchange market.The main currency pairs considered in this study's proposed model for predicting exchange rates five and ten minutes in advance are the British Pound Sterling (GBP) against the US Dollar (USD), the Australian Dollar (AUD) against the US Dollar (USD), and the European Euro (EUR) against the Canadian Dollar (CAD) are also used to evaluate the performance of the proposed model. In compared to the other three models (Multi-Layer Perceptron, Autoregressive Integrated Moving Average, and Recurrent Neural Network), CNN-RF yields better results. This conclusion has been backed by a large body of empirical research, which also suggested that this methodology be regularly used due to its high efficacy.

Currency Substitution and General Business Indicators in Nigeria

Purpose: This paper examines the effects of currency substitution on general business indicators in Nigeria. Theoretical framework: This paper is based on portfolio balance theory which is concerned with interest rate adjustment and achieving the market equilibrium on currency substitution aggregate. Design/Methodology/Approach: The paper employed appropriate econometric techniques such as the cointegration and error correction model (ECM) approach to examine the long run and short run attendant relationships. Findings: Empirical findings from this study indicate that there is a long run relationship between currency substitution and general business indicators variables as inflation, interest rate differentials, and exchange rate depreciation in Nigeria, the magnitudes of the impact of each are weak. Research, Practical & Social implications: The construction and analysis of currency substitution and general business environment by this study have provided relevant information for Nigerian economy in preparing for substantial currency substitution that would give clear understanding of the aggregate business environment on existing currency substitution policy that may lessen the anxiety of the apparent environmental challenges faced by the countries, and this will further provide policy directions for future currency substitution reforms in the various segment of the economy. Originality/Value: The originality of this study lies in its analysis of currency substitution and general business environment. Furthermore, the study highlights the relevance of tackling regulatory issues to ensure the safe and effective use of currency substitution.

The Course of Currency Substitution after the Global Financial Crisis in Turkey: Markov Regime Switching Models

Çalışmanın amacı, Türkiye’de Küresel Finansal Kriz sonrası nakit ikamesinin itici güçlerini araştırmaktır. Teorik arka plana uygun olarak belirlenen modeller, 2010:01-2023:02 dönemine ait döviz kuru beklentileri, enflasyon oranı ve yerli-yabancı faiz oranı farkı değişkenlerine ek olarak, Kur Korumalı Mevduat (KKM) dönemine ilişkin bir kukla değişkeni de içermektedir. Markov rejim değişim regresyon yöntemi aracılığıyla iki rejimli iki farklı model tahmin edilmiştir. Bu modellerden elde edilen bulgulara göre, döviz kuru beklentileri, nakit ikamesinin en önemli belirleyicisidir. Döviz kuru beklentileri ile nakit ikamesi pozitif ilişkidir. Faiz farkındaki azalmalar, nakit ikamesinde bir artış yaratırken faiz farkındaki artışların nakit ikamesi kararları üzerinde anlamlı bir etkisi yoktur. Bunun yanında, enflasyon oranlarının ise nakit ikamesi üzerinde anlamlı bir etkisinin olmadığına ulaşılmıştır. Buna karşılık, nakit ikamesi, bir önceki döneme ilişkin nakit ikamesi kararlarından büyük ölçüde etkilenmektedir. Son olarak, KKM uygulamasının nakit ikamesinde anlamlı ve oldukça yüksek bir oranda bir azalma sağladığı tespit edilmiştir. Ancak nakit ikamesiyle mücadelede, KKM gibi yüksek maliyetli politikalardan ziyade, kredibilitesi yüksek, tutarlı ve güçlü politikaların tercih edilmesinin daha uygun olacağı düşünülmektedir.

Currency substitution in a world of looming retail CBDCs: Suggestive currency substitution-based evidence

SummaryDigitalization, spurred by the pandemic, has accelerated plans by many central banks to introduce retail digital currencies (rCBDCs). If international coordination eventually allows individuals to hold digital multiple currencies this potentially implies greater scope for currency substitution. The potential to ease constraints on currency substitution dovetails nicely with the G20′s continuing aspiration to enhance digitalization as a “tool” to improve economic performance and reduce inequality. Nevertheless, as discussed in our study, opportunities for individuals and small businesses to exploit the promise of lower transactions costs thanks to digitalization will be difficult to realize in the current regulatory and geopolitical environment.Nevertheless, policy makers will not be able to make sensible choices unless they appreciate the scope for currency substitution in a world with rCBDCs. Accordingly, this paper provides new estimates of the potential for currency substitution using data from a cross-section of advanced and emerging economies. In relation to the existing literature, we apply existing econometric methodologies in novel ways to generate estimates of the degree of currency substitution conditional on technological and institutional factors. These are critical ingredients in the potential success of rCBDCs on a global scale.Our empirical study asks: What is the scope for currency substitution? It uses data from a cross-section of advanced and emerging economies, large and small, and with varying degrees of openness. First, we estimate for a panel using Generalized Method of Moments whether the degree of currency substitution differs between advanced (AE) and emerging market economies (EME). For narrow definitions of money, the answer is negative. For a broader definition of the money supply the differences are statistically significant. Indeed, the scope for currency substitution is larger for the group of emerging market economies considered.Next, we consider what happens when we think of the digitalization of money as a treatment or intervention. We estimate difference-in-difference models to estimate the possible impact on money demand using narrow and broad definitions of money. Generally, the results support those obtained using the GMM method although the size of the currency substitution effect is smaller.Important policy implications stem from our study. Since a currency is a symbol of sovereignty the scope for currency substitution estimated in this study suggests that the regulatory framework for rCBDCs is crucial as it determines how easily individuals can hold and transact digitally in different currencies across borders. One important implication is that new macroprudential tools might be needed to preserve the ability of countries to pursue independent monetary policies. Another implication is that, in a sufficiently liberal regulatory environment, cross-border holdings of rCBDCs might encourage more countries to adopt or stick to best practices in macroeconomic management and incentivize others who already do so to maintain these practices. Much will depend on whether policy makers allow markets to harness the promise of lower transactions costs and faster payments settlement.

Monetary Policy and Economic Growth in Nigeria: 1986 - 2019

The study examined the impact of monetary policy on economic growth in Nigeria. The research adopted the causal research design. Time series data sourced from the Central Bank of Nigeria Statistical Bulletin from 1986 to 2019 was used to determine the impact of monetary policy on economic growth in Nigeria. Economic growth was proxied by Gross Domestic Product while monetary policy was proxied by money supply, exchange rate, interest rate and inflation. Trend analysis was employed in the analysis and the hypothesis was tested at 5% level of significance. To get a more robust estimate of the effects of the independent variables on the dependent variable, the log of the variables were taken. The unit root test result showed that the log of GDP, INTR and were stationary at level while the log of MS and EXCHR were stationary at first difference. Consequently, we applied the ARDL model in the analysis. The result showed that money supply and exchange rate had negative and non significant impact on economic growth of Nigeria. However, the study revealed that the one period lag of exchange rate, as well as interest rate and inflation had positive and significant impact on economic growth. Monetary policy was found to be linked to economic growth and can be used to successfully manage the Nigerian economy, making it a valuable tool for price stability and increased output. Nevertheless, monetary policy implementation in developing countries, such as Nigeria has extra problems not faced by industrialized countries, with much fiscal dominance and currency substitution. As a result of these shortcomings, the study recommends that, the monetary policy authorities should effectively maximize their policy objectives for the country to get maximum benefit from monetary policies.

Going beyond frontiers in household energy transition in Poland—a perspective

Transition towards a cleaner and more sustainable environment is mainly driven by co-participation of households, whereas the residents’ transformation willingness is determined by various factors, including an environmentally-friendly attitude and greater public awareness. Simultaneously, the global push for a climate-neutral economy fuels the increasing emphasis on eco-consciousness and promotion of green investments. However, Poland still heavily relies on coal for energy production, despite the opportunities provided by the EU. Poland faces challenges in transitioning its households to cleaner energy sources, particularly due to historical conditions and the dominance of solid fuel boilers. This article shed light on the inefficiency of the energy transition process in Poland, presenting legal, economic, and social aspects. Despite multiple efforts, energy transition in Poland is not as buoyant as in other EU countries. Among the reasons for this phenomenon are the adverse behavior of residents, or government policies that favor the carbon-centric nature of the economy resulting in the low use of EU and state funds. This may lead to a continuation of the slower pace of change and eventually reaching the Frontier of development in Poland’s energy transition. The multitude of campaigns and initiatives encouraging Poles to switch to green energy should be underscored, but due to their scant ecological awareness and orientation towards economic rather than ecological considerations, existing measures should be reviewed. In view of the above, to ensure an effective transition, it is necessary to recognize and clearly define the incentives that would induce Polish households to use climate-neutral energy sources.Foreword: Monetary data has been standardized and, in view of this, the paper uses the euro (EUR) currency, including in places where the original data was given in a different currency. The exchange rate as of 12 June 2023 was used.

Estimating the effect of currency substitution on exchange rate volatility: Evidence from Ghana

Estimating the effect of currency substitution on exchange rate volatility: Evidence from Ghana