Monetary Bloc Research Articles

Impact of Technological Shock on the Sierra Leone Economy: A Dynamic Stochastic General Equilibrium (DSGE) Approach

The neoclassical growth model has emphasised the importance of technology shocks, which supposedly affect macroeconomic variables’ heterogeneously in a small open economy like Sierra Leone. Using a Bayesian DSGE methodology for a non-linear model, we found that investment-specific technological shock partly explains business cycle fluctuations in Sierra Leone. Moreover, the analysis indicates that technology shock on output, capital, and consumption is more persistent than that of interest rate. The key implication is that technological innovation is crucial for long-term steady-state growth in Sierra Leone. The results also partly confirm the neoclassical growth model prediction – that is, in the long run, productivity growth is driven only by technological progress. The model specified for this research is largely inward-looking, with a minimal role for the Bank of Sierra Leone to influence investment in technology-related investment directly. Despite this limitation and more so given the fact that the DSGE modelling concept is quite a new venture at the BSL, thoughts have been given to enhance the model’s future capabilities to incorporate both the monetary bloc and external blocs to fully assess the impact of technological shock’s transmission in the entire economy in future research.

The evolution of European economic institutions during the COVID-19 crisis.

This article argues that the incomplete economic and institutional integration of the euro area has exposed the monetary union to increasing economic divergence, which could be deepened by the COVID‐19 crisis. We discuss how monetary and fiscal measures implemented at the onset of the pandemic have contributed to mitigate the economic consequences of lockdowns, but provided limited insurance to narrow economic gaps across member countries. However, EU countries agreed on July 21, 2020 to develop, for the first time, countercyclical fiscal transfers financed by common debt issuance. We discuss the potential of this instrument to contribute to improve the resilience of the eurozone.

The evolution of the Offshore US-Dollar System: past, present and four possible futures

AbstractLittle has contributed more to the emergence of today's world of financial globalization than the setup of the international monetary system. In its current shape, it has a hierarchical structure with the US-Dollar (USD) at the top and various other monetary areas forming a multilayered periphery to it. A key feature of the system is the creation of USD offshore – a feature that in the 1950s and 60s developed in co-evolution with the Bretton Woods System and in the 1970s replaced it. Since the 2007–9 Financial Crisis, this ‘Offshore US-Dollar System’ has been backstopped by the Federal Reserve's network of swap lines which are extended to other key central banks. This systemic evolution may continue in the decades to come, but other systemic arrangements are possible as well and have historical precedents. This article discusses four trajectories that would lead to different setups of the international monetary system by 2040, taking into account how its hierarchical structure and the role of offshore credit money creation may evolve. In addition to a continuation of USD hegemony, we present the emergence of competing monetary blocs, the formation of an international monetary federation and the disintegration into an international monetary anarchy.

The Future of Offshore Dollar Creation: Four Scenarios for the International Monetary System by 2040

In order to sketch the possibility space for the future setup of the International Monetary System (IMS), this paper develops four different scenarios that outline potential outcomes of the IMS’s evolution by 2040. These scenarios derive from the analytical exercise of adopting a Money View perspective of today’s institutional shape of the IMS. The paper argues that the IMS’s current setup crucially relies on the supply of US Dollar-denominated credit money forms issued by private and public institutions outside the United States — through Eurodollar deposits, central bank swaps as well as ‘shadow money forms’ created by non-banks such as overnight repurchase agreements, money market fund shares and foreign exchange swaps. As this ‘realm’ of offshore dollar creation forms the heart of the present IMS, the four scenarios project potential institutional developments in coming decades following different trajectories. The Continued Dollar Hegemony scenario depicts the sustained dominance of private international money creation via offshore dollars within the Pax Americana. The Competing Monetary Blocs scenario envisions the US, the EU, and China as three gravitational centers with private international money creation in the blocs’ peripheries via offshore dollars, offshore euros and offshore renminbi. In the International Monetary Federation scenario, countries have created a strong publicly organized IMS, comprising a multilateral framework of one international and several regional clearing unions, based upon Keynes’ ideas for an International Clearing Union. Finally, the International Monetary Anarchy scenario entails the post-crisis emergence of a non-system with a substantial breakdown of public and private international monetary cooperation and creation. This discussion paper is the first in a series of two complementary pieces on the past, present and possible futures of the International Monetary System. It is based on the theoretical and historical foundations developed in the paper “Offshore Dollar Creation and the Emergence of the Post-2008 International Monetary System”, authored by Steffen Murau (https://ssrn.com/abstract=3191981).

Currency co-movement and network correlation structure of foreign exchange market

We study the correlations of exchange rate volatility in the global foreign exchange(FX) market based on complex network graphs. Correlation matrices (CM) and the theoretical information flow method (Infomap) are employed to analyze the modular structure of the global foreign exchange network. The analysis demonstrates that there exist currency modules in the network, which is consistent with the geographical nature of currencies. The European and the East Asian currency modules in the FX network are most significant. We introduce a measure of the impact of individual currency based on its partial correlations with other currencies. We further incorporate an impact elimination method to filter out the impact of core nodes and construct subnetworks after the removal of these core nodes. The result reveals that (i) the US Dollar has prominent global influence on the FX market while the Euro has great impact on European currencies; (ii) the East Asian currency module is more strongly correlated than the European currency module. The strong correlation is a result of the strong co-movement of currencies in the region. The co-movement of currencies is further used to study the formation of international monetary bloc and the result is in good agreement with the consideration based on international trade.

The Coming Three-Bloc World

Chris Luenen reports on the birth of a new international order, comprised of just three regional monetary and trading blocs. In the wake of the global financial crisis a new international order is coming to the fore, writes Chris Luenen. What we are witnessing today are the birth pangs of a world comprised of three regional monetary and trading blocs.

East Asian Monetary Integration: Destined to Fail?

This paper examines the economic and political economic conditions for East Asian monetary integration, with a focus on Japan's role in order to explain why East Asia is faltering in forming a regional monetary bloc. My evaluation of economic conditions in terms of self-containment of a regional economy, optimum currency area criteria (micro-economic efficiency and macro-economic stability), and seignorage revenue suggests that East Asian countries seem to be as well suited as EU countries for monetary integration. However, significant political barriers remain in East Asia. Besides rivalry between Japan and China and the lasting influence of the US in the region, Japan's ambiguous and burden-avoiding attitude towards East Asian monetary integration adds a further barrier to the process.

La zone franc est-elle le bouc-émissaire de l'échec du développement ?

C. Freud — The Franc Zone, a Scapegoat for Development Failures. World Bank experts blame the failure of structural adjustment policies in countries belonging to the West African Franc Zone on the overvaluation of the CFA franc. They advocate, therefore, breaking up this monetary bloc. It is proven that the exchange rate between the CFA and French francs has barely changed over the past 30 years, and that overvaluation does little to account for failed adjustment policies. Examples from countries outside this zone show that devaluation does not inevitably stimulate economie growth. Abolishing the franc zone would probably cause more problems than it would solve. Thanks to this zone, the shocks of economie recession that would have hurt the most underprivileged have been absorbed.

The European Monetary System: An Economic Approach to Regional Economic Integration

The European Monetary System was meant to create a stable currency and a powerful monetary bloc in the world to contribute to the stabilization of the world monetary system. This article examines how realistic these targets are and to what extent the development of exchange rates in the European Monetary System during its two and a half years of existence were compatible with them.