International Reserves Research Articles

The US current account, sustainability, and the international monetary system

In this paper, we examine the sources of the US current account imbalances and discuss the role of the international monetary system in enabling the US in carrying such external deficits. There is evidence that the stochastic properties of the US current account are not compatible with the intertemporal national budget constraint. We argue that this is likely to be related to the dominant role of the U.S. dollar as an international reserve asset, which allows the US to meet international demand for safe assets and allows borrowing at very low interest rates. Results from a structural VAR model indicate that temporary shocks dominate the current account in the short run, whereas domestic permanent supply shocks and preference shocks contribute significantly to US current account movements in the long run. To the extent that temporary shocks stem from aggregate demand, stabilizing aggregate demand is important in achieving long-term sustainability in the current account. Finally, the paper discusses the role of the international financial system and the international role of the U.S. dollar in contributing to US external imbalances.

Political booms and currency crises

This paper shows evidence that political booms, defined as the rise in governments’ popularity, are associated with a higher likelihood of currency crises. The reasoning behind this finding is that prudent economic policies to address underlying weaknesses in the economy may be political costly for incumbent governments in the short-term. Hence, popularity-concerned governments may not have enough incentives to take such corrective actions in a timely manner. This approach, in turn, can deteriorate economic fundamentals and increase related risks in the economy which can eventually lead to crises. This paper sheds light on this phenomenon in the case of currency crises, suggesting that currency crises can be viewed as “political booms gone bust” events. Moreover, it finds that higher international reserves, higher exports, and a higher degree of financial openness alleviate the effect of political booms on currency crises.

The Nonlinear Impact of Institutional Quality on International Reserves: International Evidence

This paper investigates the nonlinear effect of institutional quality on the holding of international reserves by applying the two-step system generalized method of moments on data consisting of 67 countries from 1996 to 2016. The hypothesis is that the association between institutional quality and international reserves has an inverted U pattern. The coefficient sign of the institutional quality and its square term supports the hypothesis. Besides, the marginal effects suggest that the higher the institutional quality index, the lower the demand for reserves. The outputs indicate the importance of good institutional quality in reducing the overdependence on international reserves.

Analyzing the financial composition of the Russian market

Subject. The article studies the financial composition of the Russian market. Objectives. The study identifies scenarios for the financial composition of the Russian market. Methods. The study is based on the systems approach and methods of statistical, neural network and cluster analysis. Results. The study emphasizes the importance of analyzing the financial composition of the Russian market. The Bank of Russia pursues a growth in the gross volume of loans granted by the financial system to individuals, enterprises, non-financial governmental institutions. It also tries to increment international reserves and less marketable, non-reserve assets. Depository corporations keep an eye on possible changes in requirements the bank system may set for governmental authorities of the Russian Federation, financial institutions of the Russian subjects and local authorities, governmental and other extra-budgetary funds. The study sets forth two appropriate scenarios for the financial composition of the Russian economy. I discovered that the clustering process depends in GDP at all key phases, such as production, distribution and use, and the Bank of Russia’s requirements to other financial and non-financial institutions in Rubles and foreign currency, and requirements of credit institutions to people. Basically, the macroprudential policy of the Bank of Russia shapes the financial composition of the Russian market. Conclusions and Relevance. The scenarios of the financial composition of the Russian market help the Russian government keep their activities in accordance with the Bank of Russia. The findings contribute to the knowledge and competence of the Russian government to ensure the economic growth.

FLAGGING DETERMINANTS FOR INDIAN OUTBOUND M&A

Indian enterprises have succeeded in climbing the ladder of outward M&A transactions and out performing everyone's expectations post 1990s. This paper aims to recalibrate the empirical literature of India's outbound M&A by considering the impact of host market size, appreciation in home currency, India's trade openness and liberalization policies. This study attempts to examine the impact of the host market size, home international reserves and trade openness along with home currency appreciation on the volume of the outbound M&A by Indian firms, using augmented autoregressive distributed lag (augmented ARDL) bounds testing approach. Findings reveal that appreciation of Indian rupee and liberal norms towards trade, i.e. import and export both will inevitably benefit or push the Indian firms to acquire foreign firms overseas, in the short term as well as over the long term. This paper makes an effort to identify and describe the significant factors influencing the outbound M&A deals by Indian firms in the recent years, which were previously proved relevant for group of emerging economies at large.Keywords: Outbound M&A; India, OFDI, DeterminantsJEL Classifications: F21, F23, P45, G34DOI: https://doi.org/10.32479/ijefi.11715

The Impact of Oil Price Shocks on Oil-Dependent Countries’ Currencies: The Case of Azerbaijan and Kazakhstan

The paper aims to assess the relationship between Azerbaijani and Kazakhstani exchange rates and crude oil prices volatility. The study applies the structural vector autoregressive (SVAR) model. The paper concentrates on Azerbaijan and Kazakhstan, the post-Soviet countries considered as some of the most oil-dependent countries in the Caspian Sea region. The impulse response functions suggest that the rise of crude oil prices is associated with the exchange rates decrease and thus with an Azerbaijani manat and Kazakhstani tenge appreciation against the U.S. dollar. Moreover, the results suggest that an oil price increase leads to the rise of Azerbaijani international reserves. However, the results are insignificant for the Kazakhstani foreign exchange reserves. Additionally, the study reveals a negative and significant relationship between crude oil prices and USD/KZT in both pre-crisis and the COVID-19 crisis periods. We reveal that the correlation has been stronger during the COVID-19 pandemic. However, the relationship is not significant in the case of the Azerbaijani manat. The USD/AZN exchange rate has been stable since 2017, and the first phase of the COVID-19 pandemic has not caused a change in the exchange rate and a weakening of the Azerbaijani currency, despite significant drops in crude oil prices.

Can domestic non-deliverable forwards replace the sale of international reserves? An analysis of the Brazilian experience

In the 2010s, the Brazilian Central Bank (BCB) intervened massively with domestic non-deliverable forwards (DNDFS) to offset the reversal of the global financial cycle. This article aims to investigate why the BCB used these derivatives instead of selling its international reserves, how they affected the markets, and the limits of these interventions. The main benefit of DNDFs is that they preserve the international reserves of the central bank. Since market makers use these DNDFs to hedge their supply of foreign currencies in the foreign exchange markets, the central bank can affect these markets without spending a dollar. We present evidence that DNDFs were associated with an expansion of market makers’ short dollar positions. DNDFs were also used to limit excessive currency volatility. We identified a subset of interventions aimed at offsetting excessive volatility and present evidence that the BCB could stabilize the markets on these occasions. However, DNDFs are not a panacea. If coupled with deregulated foreign exchange markets, frequent interventions may stimulate speculative activity against the domestic currency. Furthermore, they can be costly, and these costs increase the interest-bearing liabilities of the central bank, constraining the domestic policy space of the monetary authority.

Bolivia: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Bolivia

Following the October 2020 election, the new administration moved to tackle the devastating human and economic effects of the COVID-19 pandemic. The economy shows signs of recovery from its 8.8 percent contraction in 2020. However, fiscal imbalances have increased and international reserves continue to fall. On February 12, Bolivia repurchased the 240.1 million SDR purchase under the Fund’s Rapid Financing Instrument (that was approved by the Fund’s Executive Board in April 2020).

Determining The Country-Specific Variables Affecting The Market Value of Turkish Eurobonds: NARDL Approach

This study aims to determine the country-specific variables influencing the market value of eurobonds issued by the Republic of Turkey Ministry of Treasury and Finance. The study covers the period from January 2012 to June 2020. For the study, the 102-month time series are analysed with the NARDL model. Parallel to the model, independent variables are decomposed into positive and negative shocks and these components are added to the model. Thus, the existence of a significant asymmetric cointegration relationship is investigated. According to the findings, the negative and positive shocks of credit default swap in both the short and long term significantly affect the Turkish eurobond market value, but the negative shock has a greater impact. In addition, the negative shock of total international reserves in the short term and the negative shock of the current account in the long term significantly affect the Turkish eurobond market value.

The Determinants of Dollarization in Turkey: An Econometric Analysis

The aim of the study is to investigate the determinants of dollarization in Turkey. For this purpose, the 2013M1-2021M2 period was analyzed with monthly data using regression and causality tests. As a result of the regression analysis, a positive relationship was found between international reserves and returns of financial investment instruments and dollarization. On the other hand, a negative relationship was found between domestic and foreign interest rates difference and exchange rate and dollarization. As a result of the Granger causality test, a one-sided causality was found from international reserves and returns of financial investment instruments to dollarization. In addition, a one-sided causality relationship has been found from dollarization to exchange rate. Policy implications have been made in the context of the results of the study and some suggestions have been made for future studies.

Green Bonds in the Policy of Management of Central Banks’ International Reserves

The article is devoted to the management of international reserves using green bonds, which makes it possible to ensure the priorities of sustainable development formulated by the UN. The authors aim to prove the possibility of using green bonds as alternative financial assets for placing the international reserves of countries pursuing a policy of de-dollarization. The authors conclude that the inclusion of these instruments in reserve portfolios ensures their necessary diversification, structure improvement, and risk reduction and increases the confidence of investors and creditors. Substantiation of the proposal to include green bonds, denominated in euros, in the Bank of Russia's portfolio of international reserve assets is an original contribution aimed at developing approaches to the management of international reserves, considering the existing realities.

The Effects of COVID-19 Pandemic on the Government Revenue in the Extractive Industry in Tanzania

Tanzania has not been unique amid the COVID-19 pandemic in terms of economic impact. Since the first case was announced in March 2020, several thousand cases have been confirmed with several hundred deaths (real-time data). There were a number of transmitting factors and effects that exposed Tanzanian national revenue systems to great economic risk if COVID-19 was not well managed. The paper assesses the level of risks on the total government revenue resource systems, government revenue collections from the extractive industries and national expenditure budget performances. This descriptive paper uses results from the HakiRasilimali field research survey, 2020. The paper found high and increasing levels of negative and perceived risks on the government revenue mobilization, collection and utilization due to the existence of the COVID-19 pandemic. The majority perceived that the COVID-19 pandemic has high levels of risks and negative effects on the national budget expenditure frameworks in medium- and long-term periods. In the short run it is not easy to cut down and stop major recurrent government expenditures in developing economies. The public expenditure resources allocated to the Ministry of Minerals have been increasing during the COVID-19 pandemic to support the on-going mining reforms in Tanzania. Also, the government was compelled to allocate more financial resources to the health sector in order to fight against the COVID-19 pandemic and the aftermath, as well as support other most affected sectors. The paper recommends that the best way of preventing and combating the COVID-19 risks and related public health threats or possibilities is to protect and give capacity to socio-economic entities, sectors and actors’ abilities in achieving their desired short-, medium- and long-term objectives. To support a robust health and economic policy response, Tanzania has in its potential fiscal space relative to other East African countries, stable political environment, high international reserves, larger domestic market and favorable mineral commodity price movements. Tanzania has enhanced political preparedness and containment capacity through measures to strengthen detection, surveillance and combating the current COVID-19 pandemic.

Analysis of The Exchange Rate on The Thai Baht Against The Chinese Yuan Using A Support Vector Machine and Firefly Algorithm

This research constructed an optimal model to forecast the exchange rate of the Thai Baht against the Chinese Yuan by Support Vector Machine model and firefly algorithm. The software used for the construction was R program. The data used for modelling was secondary data collected from Bank of Thailand and the Ministry of Commerce, which consisted of the exchange rate of the Thai Baht against the Chinese Yuan, policy interest rate (per year), the Thai Baht index, import value, export value and international reserve fund. The collection of data was monthly records starting from January 2009 to June 2019, 126 data sets. The first 120 data sets were used for constructing the model and the last 6 data sets were used to verify the model. It was found that there were 3 factors which affected the exchange rate of the Thai baht against the Chinese yuan, with 5% statistical significance. The same direction factors were policy interest rate and import value and the opposite direction factor was international money fund. The optimal support vector machine model obtained was eps-regression type with radial basis function kernel, which had gamma parameter , epsilon parameter and cost value parameter . The model verification showed that the obtained model provided the root mean square error 0.1518 only whereas the classical multiple linear regression model provided the root mean square error 0.2614.

The SDR and influences on the currency swap agreements for RMB

ABSTRACT We analyse the determinants of RMB as an international reserve currency and the impact of joining the Special Drawing Rights (SDR) on the currency swap agreements between China and other countries. A panel logit model is estimated using annual data for China and 33 countries for the period from 2009 to 2018. The results show that the relative economic size, trade dependence, interest rate differential, and geopolitical relation are important for determining the likelihood of signing the RMB bilateral swap agreements between China and the partner countries. Our analysis also reveals that RMB’s inclusion in the SDR was an important factor raising the probability of concluding an RMB bilateral swap agreement.

Modeling the Management of International Reserves from the Perspective of Financial Stability

The paper explores the issues and international practices of the management of international reserves. The link is described between financial stability and international reserves. Emphasis is put on the specific significance of this subject for emerging economies. The main directions are charted for developing a systemic management approach in the domain and a case is made for applying modeling principles.

Barbados: Fifth Review Under the Extended Arrangement, Request for Waiver of Nonobservance of Performance Criterion, and Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Barbados

Barbados has made good progress in implementing its Economic Recovery and Transformation (BERT) plan to restore fiscal and debt sustainability, rebuild reserves, and increase growth. International reserves have increased to US$1.3 billion at end-March 2021, supported by IFI loans. This, and a successful 2018-19 public debt restructuring, have helped rebuild confidence in the country’s macroeconomic framework. However, a virtual standstill in the tourism sector during the pandemic took a significant toll in 2020, with the economy contracting by 18 percent. While Barbados was successful in containing the outbreak during 2020, a surge in COVID-19 cases in early 2021 resulted in the country’s second national lockdown in February. Economic growth is projected at 3 percent for 2021 premised on a modest recovery of tourism in the second half of the year, but the outlook remains highly uncertain, and risks are elevated, also in light of the possible impact of recent volcanic activity in neighboring Saint Vincent.

Hyperinflation, depression, and the rise of Adolf Hitler

Hyperinflation, depression, and the rise of Adolf Hitler

Botswana: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Botswana

Botswana entered the COVID-19 crisis with larger buffers than most countries, but significantly less than in the past. The country was contending with structural challenges, persistent negative external shocks and delays in adjustment that had already caused a significant weakening of international reserves coverage and the fiscal position amid high unemployment. The pandemic exacerbated these challenges causing a sharp GDP contraction, among the strongest in SSA and a widening in the current account deficit. Foreign exchange reserves dropped further, though still remaining well above adequate levels. The fiscal deficit widened significantly as the government sought to counter the economic impact of the COVID-19 crisis, and implemented a sizeable public wage increase agreed in 2019. The deficit was financed partially by drawing down on the Government Investment Account.

Economic boundaries of the Bank of Russia's operations

Subject. The article focuses on operations of the Central Bank’s of the Russian Federation. Objectives. The study is to determine economic boundaries of operations of the Central Bank of the Russian Federation. Methods. The study is based on the systems approach and methods of statistical, neural network and cluster analysis. Results. Analyzing the tomorrow-today dynamics of difference of the weighted average exchange rate RUB/USD and EUB/EUR and supply of USD and EUR, I discovered the supply of USD steadily exceeded the supply of RUB/EUR starting from 2018. Analyzing trends in growth rates of international reserves and money base (in its narrow sense), I found a growth in monetary growth starting from 2015 and currency reserves, cash in circulation (out of the Bank of Russia), statutory reserves of credit institutions in the Bank of Russia starting from 2017. Analyzing the importance of growth rates of market indicators, I identified its effective configuration referring to the dynamics of SP500. However, I point out stocks of Rostelecom, gold and RUB/USD. The article demonstrates the important ties between RTS index and stocks of Gazprom and Rostelecom, USD index ? RUB/USD, gold, SP500. Considering the existing structure of the Russian economy, the upper and base boundaries of the Bank of Russia’s operations are Repo rate and RUB/USD respectively. Conclusions and Relevance. The above economic boundaries of the Bank of Russia’s operations allow financial institutions to pursue an increase in the sustainability of the banking system, preserve the ownership structure, legal form and corporate governance, and use derivatives in order to decrease borrowings costs. The study contributes to the knowledge and competence of governmental officials so as to make administrative decisions on sources of growth in the Russian economy and respective opportunities.

Do oil endowment and productivity matter for accumulation of international reserves?

Motivated by the observation that a country tends to have more official foreign reserves if its crude oil endowment is large (small) but its productivity is low (high), we develop and estimate a dynamic stochastic optimization model to show that precautionary incentives against oil price shocks can account for a substantial part of the effects of productivity and oil endowment on a country’s foreign reserves. We demonstrate how oil price shocks are absorbed by changes in foreign reserves which, in turn, leads to less variation in aggregate consumption. Along with productivity and oil endowment, we also consider as determinants of foreign reserves conventional variables such as trade-to-GDP ratio and capital openness. Overall, our results suggest that ignoring productivity and oil endowment may lead to large bias in the estimates of some conventional determinants of a country’s foreign reserves.