Foreign Exchange Policy Research Articles

History of the Dinar and Foreign Exchange Policy in Algeria

History of the Dinar and Foreign Exchange Policy in Algeria

Changes in China's Foreign Exchange Policy Reform

Changes in China's Foreign Exchange Policy Reform

A critical analysis of the effects of the Central Bank of Nigeria foreign exchange policy on financial inclusion, anti-money laundering measures and fundamental rights

PurposeFollowing the drop in crude oil prices from a peak of US$114 per barrel in July 2014 to as low as US$33 per barrel in January 2016, the country’s reserves have suffered great pressure from speculative attacks, round tripping and front loading activities by actors in the foreign exchange (forex) market. The fall in oil prices also implied that the Central Bank of Nigeria’s (CBN) monthly foreign earnings had fallen from as high as US$3.2bn to current levels of as low as US$1bn. The net effect of these combined forces unfortunately is the depletion of the nation’s forex reserves. As of June 2014, the stock of forex reserves stood at about US$37.3bn but has declined to around US$28.0bn as of today. To avoid further depletion of reserves, the CBN adopted a number of policies including the prioritisation of the most critical needs for forex. This paper aims to critically analyse the effects of these policies on financial inclusion, anti-money laundering (AML) measures and human rights. Its aim is also to determine whether CBN’s Forex Policy does strike a fair balance between financial stability, inclusion, AML measures and human rights.Design/methodology/approachThis paper relies mainly on primary and secondary data drawn from the public domain. It also relies on documentary research.FindingsThis paper determined that the CBN forex policy does not strike a fair balance between financial stability, inclusion, AML measures and human rights.Research limitations/implicationsThis paper focuses on the effect of the most recent CBN Forex Policies on financial inclusion, AML measures and human rights. It does not address the older policies. Also, it does not address other vulnerable groups like low-income households. Its focus is on the under-served group.Originality/valueWhile many have written papers on CBN’s forex policies, none of those papers critically analysed the effects of these policies on financial inclusion, AML and fundamental rights. The Lagos Chamber of Commerce and Industry, for example, analysed the impact of these polices on the financial services sector; the manufacturing sector; food and household products; tyre and rubber industry; pharmaceutical sector, oil and gas sector; free trade zone sector; furniture manufacturers; and foam manufacturers. It made no mention of inclusion, money laundering and fundamental rights. Also, Vincent Haruna analysed the effect of these policies on Nigerians, particularly those engaged in international trade, and those who have children studying abroad. He neither specifically addressed financial inclusion nor did he make any mention of human rights and money laundering.

A Critical Analysis of the Effects of the Central Bank of Nigeria Foreign Exchange Policy on Financial Inclusion, Anti-Money Laundering Measures and Fundamental Rights

PURPOSE – Following the drop in crude oil prices from a peak of $114 per barrel in July 2014 to as low as $33 per barrel in January 2016, the country’s reserves have suffered great pressure from speculative attacks, round tripping and front loading activities by actors in the foreign exchange market.The fall in oil prices also implied that the Central Bank of Nigeria (CBN)’s monthly foreign earnings had fallen from as high as $3.2 billion to current levels of as low as $1 billion.The net effect of these combined forces unfortunately is the depletion of the nation’s foreign exchange reserves. As of June 2014, the stock of foreign exchange reserves stood at about $37.3 billion but has declined to around $28.0 billion as of today.In order to avoid further depletion of reserves, the CBN adopted a number of policies including the prioritisation of the most critical needs for foreign exchange.This paper critically analyses the effects of these policies on financial inclusion, anti-money laundering (AML) measures and human rights. Its aim is to determine if CBN’s Forex Policy does strike a fair balance between financial stability, inclusion, AML Measures and human rights. DESIGN/METHODOLOGY/APPROACH – This paper relies mainly on primary and secondary data drawn from the public domain. It also relies on documentary research. FINDINGS – This paper determined that the CBN forex policy does not strike a fair balance between financial stability, inclusion, AML Measures and human rights. RESEARCH LIMITATIONS – This paper focuses on the effect of the most recent CBN Forex Policies on Financial Inclusion, Anti-Money Laundering Measures and Human Rights. It does not address the older policies. Also, it does not address other vulnerable groups like low income households. Its focus is on the under-served group. ORIGINALITY/VALUE – While many have written articles on CBN’s forex policies, none of those articles critically analyzed the effects of these policies on financial inclusion, AML and fundamental rights.The Lagos Chamber of Commerce and Industry [LCCI], for example, analysed the impact of these polices on the Financial Services Sector, Manufacturing Sector, Food and household products, Tyre & Rubber Industry, Pharmaceutical Sector, Oil & Gas Sector, Free Trade Zone Sector, Furniture Manufacturers and Foam Manufacturers. It made no mention of inclusion, money laundering and fundamental rights.Also, Vincent Haruna, analysed the effect of these policies on Nigerians, particularly those engaged in international trade, and those who have children studying abroad. He did not specifically address financial inclusion nor did he make any mention of human rights and money laundering.

Macroeconomic shocks, bank stability and the housing market in Venezuela

The interplay between leverage, house prices and financial instability may depend on the nature of shocks affecting an economy and its policy setting. We investigate which conditions or shocks explain financial stability and house prices in Venezuela. Rising financial instability is observationally associated with tight monetary conditions, high interest rates and an appreciated domestic currency. Under the current institutional framework, fiscal and foreign exchange policy actions deliver the strongest monetary effects affecting bank funding and stability. Real house prices respond to loose monetary conditions and real demand shocks. Findings suggest that macroprudential prescriptions should aim at stabilizing bank funding.

Book Reviews

Jeffry Frieden of Harvard University reviews “Strained Relations: US Foreign-Exchange Operations and Monetary Policy in the Twentieth Century”, by Michael D. Bordo, Owen F. Humpage, and Anna J. Schwartz. The Econlit abstract of this book begins: “Explores the evolution of US policy regarding currency market intervention and the interaction of currency market policy with monetary policy, and explores this evolution by drawing on foreign exchange transactions conducted through the Federal Reserve Bank of New York between 1962 and 1995. Considers how changing economic and institutional circumstances and political and bureaucratic factors affected foreign exchange policy. Discusses the evolution of US foreign exchange market intervention—thesis, theory, and institutions; exchange market policy in the United States—precedents and antecedents; introducing the Exchange Stabilization Fund, 1934-61; US intervention during the Bretton Woods era, 1962-73; US intervention and the early dollar float, 1973-81; US foreign exchange market intervention during the Volcker-Greenspan era, 1981-97; lessons from the evolution of US monetary and intervention policies; and foreign exchange market operations in the twenty-first century.” Bordo is a Board of Governors Professor of Economics at Rutgers University. Humpage is a senior economic advisor in the Research Department of the Federal Reserve Bank of Cleveland. The late Schwartz was a research associate of the National Bureau of Economic Research.

Corrupt Importers, Domestic Producers & Welfare: Role of Trade Policy

Stringent regulatory foreign exchange and trade policies create distortions and lead to mis‐invoicing of imports and exports. Such legally prescribed opportunistic behavior is alleged to be common in LDCs because of their lack of openness and restrictive policies. This paper focuses on the impact of various trade and currency policies like tariffs, quotas, different exchange rates, and devaluation and administrative policy instruments like monitoring and penalties on import mis‐invoicing under Cournot quantity competition. A framework is developed to analyze the impact of those policies on importers and domestic producers both under fixed and flexible exchange rate regimes.

Partisan Policy Swings in Japan, 1913–1932

Abstract This essay develops a temporal and conceptual framework for analyzing some core processes in the political economy of Japan and in the political economy of two-party systems in general. It takes as a case study the era of “Taishō democracy”. The two-party politics of the era, originating out of the Taishō political crisis of 1912–13, were shaped by an opposition between the so-called positive policy of fiscal-monetary expansion and the so-called negative policy of retrenchment. The “positive-negative” divide structured a wide range of policy domains, including fiscal policy, monetary and foreign-exchange policy, diplomatic policy, military policy, social policy, and industrial policy. This essay constructs a chronology of this policy dialectic across multiple policy domains and contributes to theoretical discussion of policy fields, polarities, and regimes. It concludes by making a cross-temporal comparison to policy swings in the 1990s.

Econometric Analysis of Croatia’s Proclaimed Foreign Exchange Rate

Abstract The officially proclaimed foreign exchange policy of the Croatian National Bank (CNB) is a managed float with a discretionary right of intervention on the Croatian kuna/euro foreign exchange (FX) market in order to maintain price stability. This paper examines the validity of three monetary policy hypotheses: the stability of the nominal exchange rate, the stability of exchange rate changes, and the exchange rate to inflation pass-through effect. The CNB claims a direct FX to inflation rate pass-through channel for which we find no evidence, but we find a strong link between FX rate changes and changes in M4, as well as between M4 changes and inflation. Changes in foreign investment Granger cause changes in monetary aggregates that further Granger cause inflation. Changes in FX rate Granger cause a reaction in M4 that indirectly Granger causes a further rise in inflation. Vector Autoregression Impulse Response Functions of changes in FX rate, M1, M4, and CPI confirm the Granger causalities in the established order.

On the formulation of TCM foreign exchange policy after the reform and opening-up

The foreign exchange activities of traditional Chinese medicine are conducted under the guidance of the policy of the CPC and Chinese government. After the carrying out of the reform and opening-up policy, foreign exchange policy of TCM has experienced the process of growing up from nothing, from less to more, and from coarse to fine, which is closely related to our country's foreign policy, the cause of Chinese medicine development, and urgent need of international communication. In the three decades after the reform and opening-up policy, the formulation of foreign exchange policy of TCM can be divided into three stages: viz., inclusion in the framework of national foreign policy (1978-1985), embodiment in the policy of developing TCM cause (1986-1996), and appearance in the special policy of foreign exchange of Chinese medicine (since 1997). From the development process of these policies, the development of each policy gradually complies with the process of the development of the times, with its contents basically in line with the requirements of the times. The implementation of some policies promotes the foreign exchanges and cooperation of Chinese medicine.

Policy mix for fiscal consolidation in Serbia: Conditional forecast approach

The Serbian Parliament has adopted the fiscal consolidation program recognizing an exponentially rising public debt as a real threat to the economy that must be contained in order to avoid sovereign default. Despite the legacy of unfavorable macroeconomic development due to last-year's flood, a challenging expenditure cuts approach was adopted. It will keep domestic demand at depressed levels for some time even if austerity measures are not front-loaded but phased-out over three years. The reverse of the debt trend is projected for 2017, when the debt-to- GDP ratio will reach 80 percent. We use in this paper QUEST_SERBIA DSGE model to assess what would happen to the Serbian economy if the policy maker consistently implemented the policy package. Results are compared with model based estimates of what would happen if the policy maker did nothing at all. The differences between these experiments are considered as net effects of the fiscal consolidation package. Assessment of the spontaneous development is based on an unconditional forecast from the model, while controlled development is based on a conditional forecast. The social costs of fiscal consolidation will be significant if the fiscal policy is not supported by an adequate mix of monetary and foreign exchange policies. Among alternative scenarios we had designed, a delay in monetary easing was the worst case. A timely easing of the monetary policy followed by a relatively stable real exchange rate shows the best simulation results. Fiscal consolidation as proposed is a workable policy, which will keep the rising debt-to-GDP ratio at sustainable level, but it is still not sufficient to reverse debt trend in 2017. Perhaps the other structural measures will do this job, but they are beyond the scope of this paper.

Foreign policy ‘trilemmas’: understanding China's stance on international cap-and-trade

This article uses a policy analogy approach to explore China's attitude toward the possibility of global carbon market integration, including the development of a common cap-and-trade market for the global civil aviation industry. Like in other foreign policy domains, in international cap-and-trade, China faces a ‘trilemma’ between carbon market integration, state sovereignty and policy flexibility. By referring to how China has approached a comparable trilemma in foreign exchange policy making, we analyse China's possible stance on international cap-and-trade. We argue that China will prefer to gradually establish and strengthen, to a limited extent, intergovernmental governance mechanisms, which allow nation-states to prioritize sovereignty and policy flexibility in carbon trading policy making. In the conclusion we use this argument to explain China's responses to the carbon-trading initiatives of Australia, the EU, the International Civil Aviation Organization (ICAO), and the World Bank.Policy relevanceThe international community has reached a consensus on the use of market mechanisms for mitigating climate change. While opposing the EU's plan to include Chinese airlines in the EU Emissions Trading Scheme, China has started to co-explore with Australia the possibility of linking their carbon markets, and has adopted a supportive attitude toward the carbon trading initiatives led by the ICAO and the World Bank. Considering China's status as the largest emitting country of GHGs and its interdependence with major developed and developing countries, China's substantial participation would be crucial to the success of the global market-based efforts to reduce GHG emissions. This article presents an initial attempt to develop a better understanding of China's stance on international cap-and-trade.

Evolution of India’s Foreign Exchange Market

India’s foreign exchange policy after Independence has evolved in tandem with international developments and domestic requirements. The post-reforms period has been marked by wide-ranging measures to widen and deepen the market, besides exchange rate liberalisation. The momentous developments over the past few years are reflected in the enhanced risk-bearing capacity of banks along with rising foreign exchange trading volumes and finer margins. The foreign exchange market has acquired depth. With the economy moving towards fuller capital account convertibility in a calibrated manner, focused regulation and monitoring of the foreign exchange market assumes added importance. In this context, there is a need to strengthen infrastructure, transparency and disclosure, and product range in the foreign exchange derivative markets.

The Possible Trinity: Optimal Interest Rate, Exchange Rate, and Taxes on Capital Flows in a DSGE Model for a Small Open Economy

Abstract A traditional way of thinking about the exchange rate (XR) regime and capital account openness has been framed in terms of the ‘impossible trinity’ or ‘trilemma’, in which policymakers can only have 2 of 3 possible outcomes: open capital markets, monetary independence and pegged XRs. This paper is an extension of Escude (A DSGE Model for a SOE with Systematic Interest and Foreign Exchange Policies in Which Policymakers Exploit the Risk Premium for Stabilization Purposes, 2013), which focused on interest rate and XR policies, since it introduces the third vertex of the ‘trinity’ in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE’s international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of a triangle. Each of 3 possible government intervention policies taken individually (in the domestic currency bond market, in the FX market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the 3 possible pairs of intervention policies corresponds to one of its 3 edges, and the 3 simultaneous intervention policies taken jointly correspond to its interior. This paper shows that this interior, or ‘possible trinity’ is quite generally not only possible but optimal, since the CB obtains a lower loss when it implements a policy with all three interventions.

130 years of the National Bank of Serbia 1884-2014

The National Bank of Serbia, one of the most important state institutions of the Republic of Serbia, celebrates its grand jubilee this year - 130 years since its establishment. As the 16th central bank in the world, it was funded by equity capital from domestic sources. The Bank started its operations on 2 July 1884 pursuant to the Law on the Privileged National Bank of the Kingdom of Serbia, adopted on 6 January 1883 and published in 'Novine Srpske' on 19 January of the same year. Prior to the adoption of this Law, the Serbian monetary system was regulated by the Law on Minting Silver Coins, enacted in 1873, which set up the dinar as the sole legal tender in Serbia. The role of the Bank was defined by the Law on the Privileged National Bank of the Kingdom of Serbia, enacted in 1883, and was as follows: 'In order to improve trade and crafts in the Kingdom of Serbia using cheap capital and well-designed credit, the Royal Government is empowered to establish the National Bank in accordance with the legal provisions of this Law.' The initial discount rate of the National Bank was low and stable at 5.5% and the Lombard rate amounted to 6.5%. In the years up to 1941 these rates were relatively stable and usually varied between 5.5-8% at the annual level. During World War I, the National Bank was evacuated to Marseilles, while holding a representative office in London during World War II. During the 130 years of its operation, the National Bank has been run by 28 governors, the first of which was Aleksa Spasić, and three of which served two terms in office. The National Bank changed its name several times to reflect the change in the name of the state and its organization, and operated in different economic, social and international environments, including times of war, trade, economic and financial sanctions, hyperinflation and different internal and international political circumstances. Nowadays the National Bank of Serbia is organized as a modern central bank pursuant to the objectives and principles applied in Europe and beyond. Its legal mandate is the implementation of monetary and foreign exchange policies with the objective of maintaining low and stable inflation and preserving financial stability in the Republic of Serbia.

Monetary and foreign currency policy of the European Central Bank

The paper analyzes how successful the ECB has been in pursuing its monetary and foreign exchange policy, which is, at the same time, a complex issue and crucial for the justification of its existence. Firstly, the ECB is trying hard to keep up with the global crisis and to maintain the stability of the euro. The main task of the ECB is to keep inflation below 2% p.a. This paper demonstrates that the ECB has managed to retain inflation within the required limits for a significant period of time, except for few relatively short-lived exceptions. By managing an adequate monetary policy the ECB has successfully accomplished its goals in the period of reference, as demonstrated by inflation trend results, monetary aggregate M3, and the level of interest rates.

Валютная политика КНР: исторический аспект

The article analyzes the distinctive features of the PRC foreign exchange policy from the historical perspective, taking the national color into account and emphasizing the traditions-modernity unity in its strategy. It reviews the debates over renminbi exchange rate, disclosing the weakness of the modern international foreign exchange law. It systemizes the practices of international pressures applied to China in this aspect. It is stated, that China’s foreign exchange reforming process is of a long-term nature, and it will be completed only by the time the Chinese economy gets adjusted to the world market’s requirements.

Analysis of lndia's Exchange Rate under the New Economic Policy Regime

Exchange rate is a very important financial variable as it affects the decisions that are made by the foreign exchange investors, exporters, importers, bankers, financial institutions, business and policy makers in the developed and the developing countries. Exchange rate movement affects trade and capital flows. It is also important to understand the financial development and changes in economic policy. The study deals with analyzing the exchange rate behavior during the post reform period. The time period of the study is from April 1,1994 to March 31,2012. It looks into the major determinants of India's exchange rate in the long run. The findings from the study are that the exchange rate has been stable with the intermitted period of fluctuations. Exchange rate is determined by economic fundamentals such as the Economic Activity, Inflation, Bombay Stock Exchange Sensex, Rate of Interest, and Trade Deficit. The most significant variables are Bombay Stock Exchange Sensex and Interest Rate.

The effects of foreign exchange and monetary policies in Russia

This paper examines the effects of Russian foreign exchange and monetary policies under conditions of abundant natural resources during the period 1999–2011 using structural VAR models. The results suggest that monetary policy shocks, which are identified as money supply disturbances, have a persistent effect on real output, and more than half of the volatility in real output can be explained by changes in the money supply. Furthermore, the analysis reveals that stock prices are a more significant transmission channel of monetary policy than bank loans.

A DSGE Model for a SOE with Systematic Interest and Foreign Exchange Policies in Which Policymakers Exploit the Risk Premium for Stabilization Purposes

Abstract This paper builds a DSGE model for a small open economy (SOE) in which the central bank intervenes the domestic currency bond and FX markets using two policy rules: a Taylortype rule and a rule that determines the rate of nominal depreciation. The 2 ‘corner’ regimes, in which only one policy rule is used, are particular cases. The model is calibrated and implemented in Dynare for simple and optimal simple policy rules, and optimal policy under commitment. Numerical losses are obtained for ad-hoc loss functions for different sets of central bank preferences. The results show that the losses are lower when both policy rules are used. This is due to the central bank’s enhanced ability, when it uses the two policy rules, to influence private capital flows through the effects of its actions on the endogenous risk premium in the risk-adjusted uncovered interest parity equation.