Foreign Exchange Operations Research Articles

Dancing Together at Arm’s Length? The Interaction of Central Banks with Governments in the G7

Central bank independence is a common feature in advanced economies. Delegation of monetary policy to an independent central bank with a clear mandate for price stability has proven to be successful in keeping a check on inflation and providing a trusted currency. However, it is also a fact that central banks in most countries have regular contacts with the government and cooperate with them on a number of issues. This paper looks into the various forms of cooperation between central banks and governments in the G7. The focus is on those central banks that exercise a monetary policy decision-making function, i.e. the ECB and the central banks of the four G7 countries outside the euro area (the US, UK, Japan and Canada). The paper first reviews the objectives of and arrangements for central bank/government cooperation in the US, UK, Japan and Canada in areas such as monetary policy and its interlink with economic policy; foreign exchange operations and foreign reserve management; international cooperation; payment systems/securities learing and settlement systems; upervision, regulation and financial stability; banknotes and coins; collection of statistics; and the role of fiscal agent for the government. In parallel the paper looks into the objectives of and arrangements for cooperation between the ECB and relevant European counterparts, reflecting the specific European institutional environment characterised by the absence of a ‘European government’. Following a comprehensive stocktaking of practices, the paper embarks on a comparison of existing arrangements, pointing to the similarities and differences among the five surveyed central banks. The Appendix provides a more in-depth description of central bank/government cooperation per country and topic; it presents the detailed factual background on which the paper builds, serving as a reference for the reader interested in more detail. JEL Classification: D83, C62, E30

The Foreign Exchange Exposure of Chinese Banks

Using the capital market approach and the equity price data of 14 listed Chinese banks, this empirical study finds that there is a positive relationship between bank size and foreign exchange exposure. This relationship may reflect the larger foreign exchange operations and trading positions of larger Chinese banks and their significant indirect foreign exchange exposure arising from impacts of the renminbi exchange rate movements on their customers. Empirical evidence also suggests that the average foreign exchange exposures of state-owned and joint-stock commercial banks in China are higher than those of banks in Hong Kong, notwithstanding their limited participation in international banking businesses compared with their Hong Kong counterparts. It is also found that negative foreign exchange exposure is prevalent for larger Chinese banks, suggesting that an appreciation of the renminbi tends to reduce their equity value. It is therefore likely that the banking sector’s performance will be hampered. Together with the fact that decreases in equity values generally imply a higher default risk, the effects of different scenarios of renminbi appreciation on the default risk of Chinese banks should therefore be closely monitored.

The foreign exchange exposure of Chinese banks

Using the capital market approach and the equity price data of 14 listed Chinese banks, this empirical study finds that there is a positive relationship between bank size and foreign exchange exposure. This relationship may reflect the larger foreign exchange operations and trading positions of larger Chinese banks and their significant indirect foreign exchange exposure arising from impacts of the renminbi exchange rate movements on their customers. Empirical evidence also suggests that the average foreign exchange exposures of state-owned and joint-stock commercial banks in China are higher than those of banks in Hong Kong, notwithstanding their limited participation in international banking businesses compared with their Hong Kong counterparts. It is also found that negative foreign exchange exposure is prevalent for larger Chinese banks, suggesting that an appreciation of the renminbi tends to reduce their equity value. It is therefore likely that the banking sector's performance will be hampered. Together with the fact that decreases in equity values generally imply a higher default risk, the effects of different scenarios of renminbi appreciation on the default risk of Chinese banks should therefore be closely monitored.

Foreign exchange intervention and the Australian dollar: has it mattered?

AbstractSince the Australian dollar was floated in December 1983, the Australian central bank (Reserve Bank of Australia) has actively intervened in the foreign exchange market. Using daily exchange rate and official intervention data from January 1984 to December 2001, this paper examines what effects, if any, foreign exchange operations by the Reserve Bank of Australia (RBA) have had on the level and volatility of the Australian dollar exchange rate. First, using an event study we evaluate the effectiveness of intervention by examining its direct effect on the level of the exchange rate. We find that over the period 1997–2001, the RBA has had some success in its intervention operations, by moderating the depreciating tendency of the Australian dollar. Second, we investigate the effects of RBA intervention policies on exchange rate volatility over the floating rate period. Our results indicate that intervention operations tend to be associated with an increase in exchange rate volatility, which suggests that official intervention may have added to market uncertainty. Overall, the effects of RBA intervention are quite modest on both the level and the volatility of the Australian dollar exchange rate. Copyright © 2006 John Wiley & Sons, Ltd.

Democratic Republic of Congo - Evaluation of the Technical Assistance Program (May 2001 to April 2004) and of Areas for Further Assistance to the Central Bank of Congo

This report discusses the results of the evaluation of the MFD technical assistance program with the BCC. The evaluation covered the period May 2001-April 2004 and focused on foreign exchange and monetary operations, internal audit, accounting, banking supervision. It was conducted during December 14-17, 2006 in conjunction with an MFD advisory mission. The mission examined the implementation of this program by two (2) resident experts (a general advisor to the Governor and a resident advisor responsible for internal audit), three (3) multitopic missions, and ten (10) short-term expert visits.1

Do Macroeconomic Effects of Capital Controls Vary by Their Type? Evidence from Malaysia

This paper examines how the macroeconomic effects of capital controls vary depending on which type of international financial transaction they cover. Drawing on Malaysia`s experiences in regulating the capital account during the 1990s, it finds, in an error-correction model, that capital controls generally have statistically insignificant effects on the exchange rate. Controls on portfolio outflows and on bank and foreign exchange operations facilitate reductions in the domestic interest rate, while controls on portfolio inflows have the opposite effect, in line with the theoretical priors. Controls on international transactions in the domestic currency and stock market operations have statistically insignificant effects on the interest rate differential.

Do Macroeconomic Effects of Capital Controls Vary by their Type? Evidence From Malaysia

This paper examines how the macroeconomic effects of capital controls vary depending on which type of international financial transaction they cover. Drawing on Malaysia's experiences in regulating the capital account during the 1990s, it finds, in an error-correction model, that capital controls generally have statistically insignificant effects on the exchange rate. Controls on portfolio outflows and on bank and foreign exchange operations facilitate reductions in the domestic interest rate, while controls on portfolio inflows have the opposite effect, in line with the theoretical priors. Controls on international transactions in the domestic currency and stock market operations have statistically insignificant effects on the interest rate differential.

Foreign Exchange Intervention and the Australian Dollar: Has It Mattered?

Since the Australian dollar was floated in December 1983, the Australian central bank (Reserve Bank of Australia) has actively intervened in the foreign exchange market. Using daily exchange rate and official intervention data from January 1984 to December 2001, this paper examines what effects, if any, foreign exchange operations by the Reserve Bank of Australia (RBA) have had on the level and volatility of the Australian dollar exchange rate. First, using an event study we evaluate the effectiveness of intervention by examining its direct effect on the level of the exchange rate. We find that over the period 1997-2001, the RBA has had some success in its intervention operations, by moderating the depreciating tendency of the Australian dollar. Second, we investigate the effects of RBA intervention policies on exchange rate volatility over the floating rate period. Our results indicate that intervention operations tend to be associated with an increase in exchange rate volatility, which suggests that official intervention may have added to market uncertainty. Overall, the effects of RBA intervention are quite modest on both the level and the volatility of the Australian dollar exchange rate.

Bank foreign exchange and interest rate risk management: simultaneous versus separate hedging strategies

This paper investigates the hedge ratio dynamics for large US banks with exposure to both interest rate and foreign exchange risks. Using a mean–variance framework, the paper evaluates hedging performance when interest rate and foreign exchange risks are hedged separately versus simultaneously. Optimal hedge ratios for separate and simultaneous hedging strategies are estimated using the multivariate GARCH model. The magnitude of separate hedge ratios is found to consistently overstate that of simultaneous hedge ratios for banks that engage in both domestic loan extensions and foreign exchange operations. Both in-sample and out-of-sample results indicate that a simultaneous hedging strategy outperforms a separate hedging strategy. The mean–variance efficiency test results strongly support statistical significance to this finding.

Foreign Exchange Intervention in Developing and Transition Economies: Results of a Survey

Based on evidence obtained from the IMF`s 2001 Survey on Foreign Exchange Market Organization, the author argues that, for several reasons, some central banks in developing and transition economies may be able to conduct foreign exchange intervention more effectively than the central banks of developed countries issuing the major international currencies. First, these central banks do not always fully sterilize their foreign exchange interventions. In addition, they issue regulations and conduct their foreign exchange operations in a way that increases the central bank`s information advantage and the size of their foreign exchange intervention relative to foreign exchange market turnover. Some of the central banks also use moral suasion to support their foreign exchange interventions.

Foreign Exchange Intervention in Developing and Transition Economies: Results of a Survey

Based on evidence obtained from the IMF's 2001 Survey on Foreign Exchange Market Organization, the author argues that, for several reasons, some central banks in developing and transition economies may be able to conduct foreign exchange intervention more effectively than the central banks of developed countries issuing the major international currencies. First, these central banks do not always fully sterilize their foreign exchange interventions. In addition, they issue regulations and conduct their foreign exchange operations in a way that increases the central bank's information advantage and the size of their foreign exchange intervention relative to foreign exchange market turnover. Some of the central banks also use moral suasion to support their foreign exchange interventions.

Foreign Exchange Intervention and the Australian Dollar: Has it Mattered?

Since the Australian dollar was floated in December 1983, the Australian central bank (Reserve Bank of Australia) has actively intervened in the foreign exchange market. Using daily exchange rate and official intervention data from January 1984 to December 2001, this paper examines what effects, if any, foreign exchange operations by the Reserve Bank of Australia (RBA) have had on the level and volatility of the Australian dollar exchange rate. First, using an event study we evaluate the effectiveness of intervention by examining its direct effect on the level of the exchange rate. We find that over the period 1997-2001, the RBA has had some success in its intervention operations, by moderating the depreciating tendency of the Australian dollar. Second, we investigate the effects of RBA intervention policies on exchange rate volatility over the floating rate period. Our results indicate that intervention operations tend to be associated with an increase in exchange rate volatility, which suggests that official intervention may have added to market uncertainty. Overall, the effects of RBA intervention are quite modest on both the level and the volatility of the Australian dollar exchange rate.

Foreign Exchange Intervention and the Australian Dollar: Has it Mattered?

Since the Australian dollar was floated in December 1983, the Australian central bank (Reserve Bank of Australia) has actively intervened in the foreign exchange market. Using daily exchange rate and official intervention data from January 1984 to December 2001, this paper examines what effects, if any, foreign exchange operations by the Reserve Bank of Australia (RBA) have had on the level and volatility of the Australian dollar exchange rate. First, using an event study we evaluate the effectiveness of intervention by examining its direct effect on the level of the exchange rate. We find that over the period 1997-2001, the RBA has had some success in its intervention operations, by moderating the depreciating tendency of the Australian dollar. Second, we investigate the effects of RBA intervention policies on exchange rate volatility over the floating rate period. Our results indicate that intervention operations tend to be associated with an increase in exchange rate volatility, which suggests that official intervention may have added to market uncertainty. Overall, the effects of RBA intervention are quite modest on both the level and the volatility of the Australian dollar exchange rate.

CONT–BOUCHAUD PERCOLATION MODEL INCLUDING TOBIN TAX

The Tobin tax is an often discussed method to tame speculation and get a source of income. The discussion is especially heated when the financial markets are in crisis. In this article we refer to the foreign exchange markets. The Tobin tax should be a small international tax affecting all currency transactions and thus consequently reducing destabilizing speculations. In this way this tax should take over a control function. By including the Tobin tax in the microscopic model of Cont and Bouchaud one finds that this tax could be the right method to control foreign exchange operations and to get a good source of income.

Central bank secrecy in the foreign exchange market

This paper argues that with sticky goods prices and a forward-looking exchange rate, the central bank will only want a partial dissemination of its information about shocks to the economy. It is shown that, in such a model, the central bank may prefer to intervene secretly in the foreign exchange markets when responding in anticipation of future shocks, but openly when reacting to current shocks. The model thus provides a rationale for secrecy in central bank foreign exchange operations. The model also elucidates the relationship between the signaling and portfolio balance channels of sterilized intervention.

Treasury and Federal Reserve Foreign Exchange Operations

During the second quarter of 2001, the dollar appreciated 3.3 percent against the euro and depreciated 1.2 percent against the yen. On a trade-weighted basis, the dollar ended the quarter nearly unchanged against the currencies of the United States' major trading partners. Over the quarter, market perceptions that the U.S. economy would emerge from its downturn sooner than the euro area provided underlying support for the dollar. The U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter.

Treasury and Federal Reserve Foreign Exchange Operations

During the third quarter of 2001, the dollar depreciated 7.3 percent against the euro and 4.1 percent against the yen. On a trade-weighted basis, the dollar ended the quarter 2.6 percent lower. Economic data released even before the terrorist attacks on September 11 suggested that the U.S. economic slowdown would likely be more protracted than previously expected, which generally weighed on the dollar. The attacks heightened pre-existing concerns about the weakness of the U.S. economy and lent further momentum to the general trends that prevailed earlier in the quarter. The U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter.

Twin crises and the intermediary role of banks

Banking and balance of payments crises often happen simultaneously. We show that the impact of a devaluation on the net worth of commercial banks with a short open foreign exchange position speeds up the timing of a balance of payments crisis. In an asymmetric information framework, domestic commercial banks have to pay a positive risk premium on the international capital market which is determined by their net worth. Some stylized facts from selected crises episodes are presented in order to gauge the empirical relevance of the effects that have been stressed in the model. Copyright © 1999 John Wiley & Sons, Ltd.

Twin crises and the intermediary role of banks

Banking and balance of payments crises often happen simultaneously. We show that the impact of a devaluation on the net worth of commercial banks with a short open foreign exchange position speeds up the timing of a balance of payments crisis. In an asymmetric information framework, domestic commercial banks have to pay a positive risk premium on the international capital market which is determined by their net worth. Some stylized facts from selected crises episodes are presented in order to gauge the empirical relevance of the effects that have been stressed in the model. Copyright © 1999 John Wiley & Sons, Ltd.

Central Banking without Central Bank Money

Given the rapidly declining demand for central bank reserves and their gradual replacement in wholesale payments by alternative forms of money—clearinghouse moneyand treasury money—this paper discusses whether the complete extinction of base money could undermine monetary control. It argues that such concerns are misplaced since central banks can target interest rates and inflation even in the absence of base money. The paper explores implications for current and future central banking, including monetary and foreign exchange operations, lender of last resort, coordination between public debt and monetary management, and design of operating rules in currency boards.