Independent Monetary Research Articles

Monetary Independence and Rollover Crises

Abstract This article shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary independence, lenders anticipate that the government would face a severe recession in the event of a liquidity crisis and are therefore more prone to run on government bonds. In a quantitative application to the Eurozone debt crisis, we find that the lack of monetary autonomy played a central role in making Spain vulnerable to a rollover crisis. Finally, we argue that a lender of last resort can go a long way toward reducing the costs of giving up monetary independence.

Can Central Banks circumvent the impossible trinity within their operational frameworks? Theory and evidence

AbstractCentral Bank operational frameworks can be challenged during times of severe financial stress. Typical of such an instance is where policymakers attempt to heavily manage or fix a domestic exchange rate whilst faced with balance of payments pressures. However, it is claimed to be impossible for policymakers to achieve both monetary independence and exchange rate stability if the domestic economy were to post a balance of payment surplus, otherwise known as the ‘impossible trinity’. The purpose of this paper is to investigate the European Monetary System crisis through the lens of Institutional Practice, that is the day‐to‐day operations of key institutions, such as the Central Bank, Treasury and commercial banks, with a view to demonstrate why global imbalances are able to occur and persist across the international monetary system. Through both a theoretical and an empirical appraisal, this paper shows how Central Banks in economies with a balance of payments surplus can circumvent the binding constraints of the trinity within their operational frameworks.

Managed exchange rate regimes and monetary independence: an empirical appraisal

ABSTRACT Under the impossible trinity, it is alleged that attempts to maintain both monetary independence and an undervalued domestic exchange rate whilst being exposed to global capital flows will culminate in macroeconomic instability. To analyse the validity of the impossible trinity in the instance of a balance of payments surplus, we first employ a number of ARDL models to investigate the potential presence of co-integration between foreign reserves and several variables on the balance sheet of the Central Bank. A VECM is then used to exemplify the fact that policymakers must respond to an increase in foreign reserves so as to steer the interbank rate to the policy rate. In total, we argue that in the case of a balance of payment surplus (i) it is problematic to validate the existence of a transmission mechanism between foreign reserve accumulation and inflation; (ii) economies with heavily managed exchange rates appear to have achieved monetary independence whilst remaining open to global capital flows; and finally, (iii) since the four Central Banks examined target an overnight rate, rather than any form of monetary aggregate, ‘exogenous’ sterilisation initiatives are involuntary.

The path of impossible trinity in India: 1991-2018

To test the existence of impossibility trinity constraint in the Indian context, we build three impossible trinity indices, viz., capital account openness, monetary independence and exchange rate stability using data for the period 1991-2018. We find the evidence on the existence of the trilemma where the constraint increases with rise in capital account openness. We also find that monetary independence comes at the cost of exchange rate stability. Our results on the implications of movements in trilemma in the presence of international reserves on inflation suggest that exchange rate stability has been effective in reducing inflation in India and remains a dominant policy choice. A rise in the flows of international reserves, however, could increase inflation, albeit the effect is negligible, reflecting inadequate sterilisation operations by the central bank.

Trilemma to Quadrilemma: An empirical study from Indonesia

The objective of this study is to test the trilemma and the quadrilemma monetary policy using Indonesia data with covering years 1983 – 2017. The research suggest that the monetary independence and capital account openness might have been more passionately pursued by Bank Indonesia for testing the trilemma; while testing of the quadrilemma, the concentration seems to have shifted to take a middle position within each policy objectives. In this study, the full sample period is split in three subsamples: 1983-2017, 1983 – 1999 and 2000 – 2017. The methodology used in this research is ordinary least square. Our findings show that the policy might have shifted from exchange rate stability, capital account openness and foreign reserves in the first subsample to other four policy objectives in the second subsample. It indicates that foreign reserve plays as fourth objective leading the central bank to achieve at the same time the three “impossible” goals. Therefore, taking into account foreign reserve as a monetary policy objective is deserved. Adequacy of reserves could higher our capacity to prevent or mitigate external shocks.

Are stable cryptocurrencies exempted from impossible trinity?

PurposeWhile monetary autonomy is self-explanatory for cryptocurrencies such as Bitcoin with predetermined supply path, it is of great interest to probe into the monetary structures of Stablecoins. In these supply contracts and expands and capital restrictions apply due to the existence of reserves as the exchange rate arrangement adheres to a price rule.Design/methodology/approachEver since the launch of Bitcoin and its offspring, examination of cryptocurrencies' trading activity from the empirical finance viewpoint has received much attention and continues to do so. The particular monetary arrangements found in Stable cryptocurrencies (colloquially referred to as Stablecoins), however, have not been properly (1) classified and (2) studied within an empirical international finance and banking context. This paper provides an empirical framework analogous to Impossible Trinity for exploring monetary arrangements across Stablecoins wherein reserves are held as price stability is targeted.FindingsThe study findings of existence of the degree of achievement along the three dimensions of the Impossible Trinity hypothesis, namely monetary independence, exchange rate stability and financial openness for a representative sample able to cover all varieties of Stablecoins, provide fresh empirical insights and arguments to this growing literature with respect to the success of their embedded exchange rate stabilization mechanisms. While the hypothesis can be supported for all cryptocurrencies in question, the trade-off combination among exchange rate stability, capital openness and monetary independence varies with the categorical types of Stablecoins.Research limitations/implicationsIf Stable cryptocurrencies, therefore, claim the role of global monetary assets freed from sovereign limits and national boundaries, it is critical to explore whether they adhere to traditional monetary frameworks. It goes without saying that in this work the author does not use a complete catalogue of all the available Stablecoins, rather a complete catalogue of all the possible asset classes of Stablecoins. While there is a significant difficulty in finding Algorithmic Stablecoins and, so far, there is plethora of Stable Token initiatives, a broader sample to further examine these under this paper's empirical framework is suggested. Enrichment of the robustness analysis by constructing additional proxies, possibly building time series for the proposed cmo1 subindex and using additional estimation methods is encouraged.Practical implicationsStablecoins have been developed aiming to address the issue of excessive price variation in cryptocurrencies such as Bitcoin. Holders of Stablecoins enjoy the combined advantages of using a blockchain-based digital infrastructure in fulfilling the functions of store of value and media of exchange and of using a traditional currency, which merely plays the role of the unit of account (and in some circumstances the trusted reserve to which is convertible to). Understanding the varieties of Stablecoins and quantifying the components for success of their price stabilization may result in designing better Stablecoins.Social implicationsBlockchain and cryptocurrencies have introduced new challenges to money and banking. Cryptocurrencies, which independently float such as Bitcoin, have gained the interest so far due to price variation that allows for gains. But these should be by far not considered to be a substitute to traditional means of payment. Lately, Stablecoins have increasingly gained attention for that USD Tether/Bitcoin pair (a Stablecoin pegged to the US dollar at parity) has outrun the US dollar/Bitcoin pair as the most traded pair in digital exchanges marking the strong position and high demand for Stablecoins.Originality/valueThis approach uncovers the varieties of Stablecoins with respect to their monetary constraints compared to the rest of the cryptocurrencies, which independently float. In this paper, the author provides a conceptual framework for the analysis of the exchange rate mechanisms conditional on Stablecoin asset classes accompanied with an empirical study from the monetary viewpoint. This is the first work in this attempt. The empirical framework employed is analogous to the traditional theory of international monetary economics referred to as Impossible Trinityz.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/JES-06-2020-0279

The Politicization of Monetary Policy – Revisiting Central Bank Independence in the Light of the Current Political Climate

Independent central banking has experienced a surge in public and academic attention during the past few years, and even more so during the ongoing COVID-19 crisis. An expanding toolset, heightened prominence and increasingly controversial policies have arguably pushed independent monetary policy towards stronger political intervention. This paper tests the hypothesis of a strengthened politicization of central banks qualitatively – by analyzing recent cases of political meddling – and quantitively – by updating the GMT index and juxtaposing its results to previous updates from 1991 and 2003. Not only the vast temporal gap between this paper and previous GMT analyses, but also the substantial economic developments since the early 2000s motivate this paper to take a refreshed look at the GMT index today. By regressing independence scores against economic indicators, the macroeconomic impact of monetary independence is demonstrated. This paper finds that in both cases, de facto and de jure, a loss in central bank independence has occurred while monetary autonomy still prevails to have a significant impact on inflation, inflation volatility and to a lesser extent on GDP per capita.

Let it float: Inflation and states’ priority on monetary independence over exchange rate stability

Monetary policy autonomy and exchange rate stability are desirable macroeconomic policies that cannot be attained jointly under internationally mobile capital. In this article, I explore what happens to state choices between the two policies when a key domestic economic challenge rises. Among many factors, increasing inflation directly affects citizens’ daily lives through rising living costs and decreasing purchasing power. Because dissatisfied citizens become more likely to threaten leaders’ tenure in both democracies and nondemocracies, I argue that leaders will pay closer attention to domestically oriented citizens’ interest rather than that of internationally/export-oriented actors when the inflation rate increases. In other words, to effectively tackle inflation and appease citizens’ discontent, leaders will prioritize their ability to utilize monetary policy over stable exchange rates that promote international trade and investment. As a result, states become more likely to relax exchange rates as the inflation rate increases. Interestingly, empirical results indicate stronger support for hypotheses regarding nondemocratic states.

The effectiveness of FX interventions: A meta-analysis

There is ample empirical literature centering on the effectiveness of foreign exchange intervention (FXI). Given the mix of objectives and country-heterogeneity, the general lack of consensus thus far is no surprise. We shed light on this debate by conducting the first comprehensive meta-analysis in the FXI literature, with 279 reported effects that stem from 74 distinct empirical studies. We cover estimations conducted in 19 countries across five decades. Overall, our meta-survey reports an average depreciation of domestic currency of 1% and a reduction of exchange rate volatility of 0.6%, in response to a $1 billion US dollar purchase. Results are qualitatively confirmed but smaller in size under fixed and random-effect estimations. When narrowing in on different economic factors, we find that effects are magnified for cases consistent with the monetary trilemma (greater if financial openness and monetary independence are low). Effects are also larger in emerging than advanced economies, when banking crises remain mild, and when interventions are large in size and are announced.

Asymmetrical Crisis in the European Union: The Example of Greece

The article presents the current economic crisis from an historical perspective, analyzing the building of the monetary integration and the common currency. The process is explained pointing out its effects on the European integration and outlining the positive and negative consequences of the introduction of a common currency in the European Union. The investigation continues with a general outlook of the current situation of the countries more affected by the current crisis, Greece, Ireland, Portugal, Spain and Italy. All of them have in common the necessity of extra funding in a context of austerity, plus some national particularities. The author proposes an expansion in the public spending as the only reliable way to stimulate the European economies in crisis. As the Euro meant the end of the monetary independence of the member states it is suggested an innovate solution, the creation of an Economic government in the Union in order to transfer funds from the wealthier states to the countries in troubles. It is presented as a necessity for the states in crisis, a necessity for the wealthier states and a must for the European Union. Introduction.

Lone mothers’ experiences of poverty in Finland - a capability approach

ABSTRACT The poverty of lone mothers in Finland was examined using three qualitative data sets and by implementing a capability approach (CA). The most valuable function for lone mothers, as they saw it, along with surviving monetary poverty was raising their children as good citizens. When mothers succeeded in raising ‘good citizens’, they felt they lived in a socially valued way and had achieved something that was significant in the eyes of others. The article explores the task (in CA terms functioning) of raising a good citizen by examining five capabilities that emerged from the mother’s narratives. These were: 1) social security’s role in enabling capabilities, 2) neighbourly activity as a collective capability, 3) time-autonomy and monetary independence as contrasting capabilities and 4) the capability to go beyond difficulties. The act of raising a good citizen enabled capabilities for younger generations. This was inter-generational in nature: parents did their best to invest in their children so that they would have more opportunities than the previous generation had.

The Effectiveness of FX Interventions: A Meta-Analysis

There is ample empirical literature centering on the effectiveness of foreign exchange intervention (FXI). Given the mix of objectives and country-heterogeneity, the general lack of consensus thus far is no surprise. We shed light on this debate by conducting the first comprehensive meta-analysis in the FXI literature, with 279 reported effects that stem from 74 distinct empirical studies. We cover estimations conducted in 19 countries across five decades. Overall, our meta-survey reports an average depreciation of domestic currency of 1% and a reduction of exchange rate volatility of 0.6%, in response to a $1 billion US dollar purchase. Results are qualitatively confirmed but smaller in size under fixed and random-effect estimations. When narrowing in on different economic factors, we find that effects are magnified for cases consistent with the monetary trilemma (greater if financial openness and monetary independence are low). Effects are also larger in emerging than advanced economies, when banking crises remain mild, and when interventions are large in size and are announced.

„Невъзможната трилема“ и анализ на нейната валидност чрез използване на метода на визуализацията чрез софтуер с изкуствен интелект

This research aims to visualize the "impossible trilemma", i. e. the impossibility of simultaneously having a fixed exchange rate, free movement of capital and an independent monetary policy, for every economy through the application ofartificial intelligence software. The advantages of visualization techniques are revealed. The explored countries are divided into the following panels: theEurozone countries, the developed European countries (DEC), the developed non-European countries (DNEC), the BRICS countries (Brazil, Russia, India, China and South Africa), the developing European countries and the Organizationof the Petroleum Exporting Countries (OPEC). The results of the research show a great level of confirmation of the trilemma for the developing economies and the developed non-European countries. This implies that there is a compromise between exchange rate stability, monetary independence, and free capital mobility.

Greece, a Failing State?

The article presents the current economic crisis from an historical perspective, analyzing the building of the monetary integration and the common currency. The process is explained pointing out its effects on the European integration and outlining the positive and negative consequences of the introduction of a common currency in the European Union. The investigation continues with a general outlook of the current situation of the countries more affected by the current crisis, Greece, Ireland, Portugal, Spain and Italy. All of them have in common the necessity of extra funding in a context of austerity, plus some national particularities. The author proposes an expansion in the public spending as the only reliable way to stimulate the European economies in crisis. As the Euro meant the end of the monetary independence of the member states it is suggested an innovate solution, the creation of an Economic government in the Union in order to transfer funds from the wealthier states to the countries in troubles. It is presented as a necessity for the states in crisis, a necessity for the wealthier states and a must for the European Union.

TRILEMMA POLICY PATHS AND REAL OUTPUT NEXUS IN NIGERIA

This study examined the nexus between the policy trilemma and its effects on real out-put in Nigeria. The study employed annual data spanning from 1990 to 2017. Interna-tional reserve has been included in the model due to its importance as noted in the literature. Following Hsing (2012) and Ajogbeje, Adeniyi and Egwaikhide (2018), Vector Autoregression (VAR) model was employed and specifically Autoregressive Distributed Lag (ARDL) bound test for cointegration was used. Data for the study was obtained from Aizenman, Chinn and Ito (2013), CBN Statistical Database and IMF International Financial Statistics Database. The study found a mix significant results between exchange rate stability and real GDP. The study further revealed that both monetary policy independence and capital account liberalization independently exert a significant and positive impact on real GDP but interactively they significantly re-duce the level of real output in the economy. The nexus between international reserve and real GDP was positive and significant. Therefore, the study recommends that for Nigeria to feel the positive impact of her trilemma choice on the economy, policy mak-ers should strive to pursue the policy combination consistently and buffered the econ-omy with a robust external reserve to cushion the effects of abrupt change in capital flow and exchange rate shocks.

Financial Spillovers and Macroprudential Policies

We estimate the impact of the extensity of macroprudential policies on the correlation of the policy interest rates between the center economies (CEs, i.e., the U.S., Japan, and the Euro area), and the peripheral economies (PHs). We find a more extensive implementation of macroprudential policies would lead PHs to (re)gain monetary independence from the CEs when the CEs implement expansionary monetary policy; when PHs run current account deficit; when they hold lower levels of international reserves; when their financial markets are relatively closed; when they are experiencing an increase in net portfolio flows; and when they are experiencing credit expansion.

The role of exchange rate for current account: A panel data analysis

Abstract The goal of this paper is to address the role of the real effective exchange rate (fundamentals, misalignment and volatility) for the current account using a panel data analysis for a set of 58 countries, over the period of 1994–2014. The results suggest that exchange rate misalignment is relevant for current account adjustment where countries with a more appreciated (depreciated) exchange rate face a worse (better) current account performance. Regarding the role of other control variables, current account adjustment is affected by the savings rate where higher (lower) values are associated with better (worse) current account performance, corroborating the lessons from the consumption smoothing approach. There is also evidence of a positive effect for the lagged current account (persistence effect). For emerging and less developed countries, there is evidence of a significant role played by monetary independence where more (less) monetary independence is associated with better (worse) current account performance.

Shadow of the Colossus: Euro Area Spillovers and Monetary Policy in Central and Eastern Europe

Closer integration between Central and Eastern Europe (CEE) and the EU has opened up channels facilitating the propagation of economic shocks from the core to the eastern periphery. This paper examines the effects of such shocks to economic activity and monetary conditions originating in the Euro Area (EA) on output, prices, money, and interest rates in 10 CEE countries over the period 2005-2018 using a bilateral restricted VAR framework. In contrast to previous studies, we use Divisia monetary aggregates and compare the effects of EA spillovers to domestic shocks. The results indicate that EA shocks explain the majority of variation across all macroeconomic indicators, with money supply shocks playing the most prominent role. Despite some heterogeneity, the impulse response of monetary aggregates to domestic and EA monetary shocks is almost identical across countries. The impact of the EA shock increases over time and persists, while the domestic shock dies out relatively quickly. Accordingly, we find no meaningful monetary independence in the majority of CEE countries. This is likely to prove detrimental to the effectiveness of monetary policies in CEE.

Trinity Strikes Back: Monetary Independence And Inflation In The Caribbean

AbstractMonetary independence is at the core of the macroeconomic policy trilemma. This study examines the relationship between monetary autonomy and inflation in Caribbean countries over the period 1980–2017. The empirical results show that greater monetary policy independence, measured as a country's ability to conduct its own monetary policy for domestic purposes independent of external monetary influences, leads to lower consumer price inflation. This relationship—robust to alternative specifications and estimation methodologies—has clear policy implications, especially for countries that maintain pegged exchange rates relative to the US dollar with a critical bearing on monetary autonomy. © 2019 John Wiley & Sons, Ltd.

The dilemma phenomenon, logistics for monetary independence policy and foreign exchange reserves

The development of financial integration makes a country’s economic links difficult. This is especially so for emerging market countries, which are more vulnerable to economic shocks. The objective of this paper is to explore whether the emerging market countries which adopt floating exchange rate system have realized, at the same time, in the aftermath of a crisis, free movement of capital flow and independence of monetary policy. This is done by introducing foreign exchange reserves into Mundell–Fleming model to do derivation. The approach is supported by empirical research based on 20 emerging countries including China, Brazil, Poland and South Africa and others. It was found that: (1) after the crisis, the emerging market countries that implemented floating exchange rate system did not achieve monetary policy independence. Rapid accumulation of foreign exchange reserves weakened the positive effect of the increase in money supply on output; (2) As a result of holding foreign exchange reserves, the independence of monetary policy in emerging market countries has been challenged, independently of the type of exchange rate system adopted, which proves the existence of dilemma phenomenon. Finally, this study puts forward policy recommendations on the exchange rate system and capital account convertibility for China.