Nominal Currency Research Articles

The Validity of the Bank Credit Channel in the Monetary Transmission Mechanism: VAR Analysis of Participation Banks

The relationship between Islamic banking and monetary policies, and the way this relationship is reflected in the real sector has attracted increasing attention, primarily because of the growing importance of Islamic banking activities. Therefore, a review of the effectiveness of the loan schemes of Islamic banks in Turkey can make a significant contribution to the literature. This study analyzes whether the loan schemes of public and private participation banks operating in Turkey’s dual banking system, are effective. To this end, the study relies on variance decomposition and impulse response function analyses of VAR models compiled from monthly data between 2009:01 and 2020:03. The industrial production index represents economic activity, the interest rate applied to consumer loans, and the total money supply (M1), representing the monetary policy instruments. The model also includes total loans and deposit variables made available for the participation banks, representing the bank loan scheme and other variables, including the nominal exchange rate and consumer price indexes. The study measures the responses of the exchange rate, inflation rate, industrial production index, participation banks’ total loans, and total deposits to one-unit shocks applied to monetary policy and interest rates. The findings from the impulse-response functions indicate that the credit channel in participation banks is partially additional since their total loans and deposits react to monetary policies in certain periods due to changes in money supply and interest rates. However, they cannot reflect this at the production level.

Currency exchange rate predictability: The new power of Bitcoin prices

We show that Bitcoin prices have surprisingly predictive power for nominal currency exchange rates, both in-sample and out-of-sample. The predictability follows from the fact that Bitcoin prices are forward-looking: Bitcoin efficiently incorporates expectations of currency exchange rates and their drivers, as exchange rates serve as a fundamental of Bitcoin. We examine the Bitcoin-based exchange rate prediction model in the autoregressive distributed lag (ADL) specification and the error correction specification. Forecasts based on both specifications outperform different benchmarks for some of the exchange rates. The outperformance is most pronounced at the daily horizon using the ADL model. Bitcoin-based forex trading strategies generate Sharpe ratio gains relative to the US risk-free rate and the carry trade. Bitcoin returns incorporate extra knowledge of future interest rate differentials after controlling for lagged exchange rate movements. Our result is inspiring for currency market participants, given the well-documented difficulty in exchange rate prediction.

Classification of Rupiah to Help Blind with The Convolutional Neural Network Method

Currency is an item humans require as a medium of exchange in transactions, including those with vision impairments. It can be challenging for certain blind people to identify currencies. This research aimed to help blind people identify nominal currency when in the transaction. Deep Learning with the CNN algorithm and preprocessing with a sequential model were used in this research. This algorithm is modeled as neurons in the human brain that communicate and learn patterns. Data collecting, preprocessing, testing, and evaluation are this research stage. Six hundred eighty-one datasets are used, consisting of IDR 50.000, IDR 75.000, and IDR 100.000. Model testing was carried out with different iterations of 5, 10, 15, and 20 epochs. Different epoch values will affect the time it takes the model to learn, but the length of the learning process will result in more accurate models. The highest result obtained from all epoch tests is 100%. The class prediction results for the 69 test data show that they can be predicted based on the actual class, indicating that the model is adequate. The results of this classification might be used to construct a smartphone app that would assist visually challenged people in recognizing the nominals.

ROI based Indonesian Paper Currency Recognition Using Canny Edge Detection

Paper currency recognition is important for automatic payment system. The paper performs a nominal paper detection process using image processing with canny method implemented in python programming language. The canny method is used to find edge features in the nominal currency. By using template matching of image reference, region of interest (ROI) of nominal value is extracted so that it can be used in any orientation of paper currency image. The ROI of nominal image is processed by canny edge method and spatial transformation to strengthen the image features and being processed by template matching to decide nominal currency. The study has successfully tested nominal value of 1000, 2000, 5000, 10000, 20000, 50000, and 100000 Indonesia banknotes which then the currency value will appear in the value variable in python.

The Cross-Section of Currency Appreciation Rates

We compute a cross-sectional variance decomposition for the average appreciation rate of foreign currencies. The cross-sectional dispersion in average nominal exchange rate growth is due to predictability of interest rate spreads among non-G10 currencies. However, among G10 currencies, we have an opposite pattern with cross-sectional return predictability playing the dominant role. The importance of the return channel among the G10 currencies is even stronger for real appreciation rates. By decomposing the cross-sectional return channel, pricing errors outweigh currency risk premia in terms of explaining nominal currency appreciation among G10 currencies. These results suggest important differences between G10 and other currencies.

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Missing the cut? How threshold effects distort U.S. small business lending trends

This paper estimates a downward bias over time in official U.S. lending data series widely used to proxy credit flows to small businesses. The bias occurs because the upper loan origination size threshold used to proxy this lending is fixed and denominated in nominal currency, so its real value erodes over time due to inflation. Some advocates invoke the apparent declining small business lending trend to push governments to implement support programs for these businesses. The paper offers preliminary fully inflation-adjusted multipliers applicable to nominal lending data so that analysts may observe more accurate trends and better inform policy decisions.

On the Nominal and Real Currency Devaluation Nexus in European Transition Economies

An important policy issue facing countries is the effectiveness of nominal currency devaluation in boosting exports and improving the trade balance of the devaluing country. It is argued that nominal devaluation would be effective only if it leads to real devaluation. This paper examines the relationship between nominal and real effective exchange rates for 17 European transition economies to determine whether nominal devaluation leads to real devaluation. Employing the ARDL cointegration test with quarterly data over the period 1994–2013, the results show that while nominal devaluation leads to real devaluation in the short run in all but Estonia, this short-run effect lasts into the long run in only Armenia, Bulgaria, Croatia, Georgia, Hungary, Poland, Romania, and the Czech Republic. Further analysis on sub-samples corresponding to different exchange rate regimes (pre and post ERM II) suggests that different exchange rate regimes may have different impacts on the link between nominal and real devaluations.

The euro crisis, fiscal devaluation, and impacts on the tourism sector in the Spanish economy

The current account imbalances between northern and southern euro area countries from 1998 to 2007 have been considered one of the key problems in the euro crisis. Cumulated over 12 years, the sustained differentials of high inflations in south countries led to a cumulative price differential relative to the north countries and contributed to the deterioration in competitiveness. In addition, south countries cannot use nominal currency devaluation, as it used to do before. Because of the high costs of internal devaluation, the policy option of a tax combination can replicate the effects attained under nominal exchange rate devaluation. In this article, we analyze the impacts of a fiscal devaluation on the tourism sector in the case of Spanish economy.

Real Exchange Rate Overvaluation and WTO Dispute Initiation in Developing Countries

AbstractWhy and when do developing countries file trade disputes at the World Trade Organization (WTO)? Although financial conditions have long been considered an important driver of trade policy, they have been largely absent from the literature on trade disputes. We argue that developing country governments bring more trade dispute to the WTO when overvalued real exchange rates put exporters at a competitive disadvantage. This dynamic is most prevalent in countries where large foreign currency debt burdens discourage nominal currency devaluations that would otherwise serve exporters’ interests. Our findings provide an explanation for differences in dispute participation rates among developing countries, and also suggest a new link between exchange rate regimes and trade policy.

Stress Testing of Commercial Banks’ Exposure to Credit Risk: A Study Based on Write-off Nonperforming Loans

This study introduced a stress-testing model with a dummy variable that refers to write-off non-performing loans (NPL) by Agricultural Bank of China. A new variable Y that indicated the rate of NPL in major national commercial banks in terms of logit transformation was applied to test stress tolerance. This article built a regression model on the basis of four explanation variables: the growth rate of GDP, indicator of customer price, the growth rate of supplying nominal currency and indicator of house price. Then we took advantages of VAR model to establish the relationship between variables. Based on the model, diverse scenario was set up to conduct stress test to NPL of commercial banks. The test covered four quarters and discovered that lower growth rate of GDP, slump in CPI, slowdown in supply of nominal currency and surging price of house are in charge of short-term increase in non-performing loans. From long-term perspective, the commercial banks would initiate internal system to mitigate the shock from volatile macro factors.

The Fiscal Forecasting Track Record of the European Commission and Portugal

This study aims at explaining the deviation between the budget balance ratio forecasts and the outcomes in the Portuguese official forecasts and in the European Commission (EC) vintage forecasts. Therefore, we used data from the EC for the period 1969-2011 and also the Portuguese official forecasts for 1977-2011. We explain the deviation of the budget balance-to-GDP through econometric estimations and present statistical decomposition about budget balance, revenue and spending-to-GDP deviations. The statistical significance of real GDP and inflation deviations reveals the effect of automatic stabilizers and the imperfect tax indexation system. The European panel reveals statistical significance (no significance) of investment (unemployment) deviations in the budget-to-GDP ratio. Countries with better fiscal rules seem to present favourable deviations (in the absence of fixed effects). In Portugal, there is evidence of unfavourable errors about the budget balance in nominal currency in most years, which has been offset (totally or partially) by a favourable nominal GDP effect deviation.

Is the Euro Really a Teuroo? Effects of Introducing the Euro on Prices of Everyday Non-Tradables in Slovakia

This paper looks at the Slovak experience with euro adoption from the point of view of perceived versus actual inflation and with a focus on a specific set of non-tradable prices. It examines whether Slovak consumers experienced or perceived (or both) an unusual price jump at the time of euro adoption and the possible explanations for such a phenomenon. Comparing the Slovak experience with the creation of the eurozone, and also with adoption of the single currency in Cyprus, Malta and Slovenia, we find that in terms of both reality and perceptions of general price movements every adoption is different. For Slovakia, euro adoption came at a time of disinflation, which consumers actually experienced, so there does not seem to be any overall perception that it is a ‘teuro’ (from teuer, meaning ‘expensive’ in German). We can nonetheless observe high inflation for nontradables at both the macro and micro levels, linked not only to the Slovak strategy of nominal currency appreciation prior to eurozone entry but also to the changeover itself. CEPS Working Documents are intended to give an indication of work being conducted within CEPS research programmes and to stimulate reactions from other experts in the field. Unless otherwise indicated, the views expressed are attributable only to the authors in a personal capacity and not to any institution with which they are associated.

Chronicle of Large Currency Devaluations: Re-Examining the Effects on Output

The impact of large currency devaluations on output, as measured by the real gross domestic product, continues to be an elusive question in the empirical macroeconomic literature. This paper aims at reexamining and providing new empirical evidence on this relationship, by using a sample covering 109 emerging market and developing economies for the period 1960-2006. In contrast with the existing empirical literature, we examine not just the impact of large nominal currency devaluations on output growth, as has been customary in the literature, but also provide estimates of how devaluationary episodes affect output trend. By doing so, we find that the devaluation-output relationship is not robust across regions and time, and that the persistence of devaluations matters. In particular, one-time devaluations induce output trend gains at ten year horizons, while successive devaluationary episodes have no impact whatsoever. A policy implication is that poorly executed devaluations induce no long-run output gains. Finally, the role of the external sector in explaining the heterogeneity of the results is examined. We find that real imports rather than exports do most of the adjustment, thus suggesting a strong expenditureswitching effect and, possibly, the emergence of export financing constraints at the time of devaluations. This last aspect highlights the need to avoid a credit crunch at the time of large currency devaluations as it might wipe out all the beneficial gains that devaluations may have on exports and, ultimately, on output.

The “Euro Illusion”: Illusion or Fact?

The changeover to the euro elicited an upsurge of research on the effects of the new currency on consumers’ conversion strategies, price estimates, price evaluations, choices, and purchases. This research includes longitudinal surveys, interviews, and controlled experiments, both natural and in the laboratory. The present article starts with an overview of this research after which it more specifically focuses on research showing an influence of the nominal value, as expressed in different currencies, on price evaluations and consumer choice. For most countries, the transition to the euro led to a lower nominal value currency. A bias known as the “euro illusion” has been documented such that the subjective value of money is influenced in the direction of the nominal value (i.e., in most countries prices and salaries seem smaller when expressed in euros than in the old domestic currency). Although the term was coined in connection with the euro changeover, the nominal representation of a currency has been shown to influence the subjective value of money in unfamiliar currencies other than the euro. Thus, tourists travelling abroad may frequently be subject to such an illusion. Different mechanisms have been proposed to account for the euro illusion. One is the numerosity heuristic and another the anchoring-and-adjustment heuristic in conjunction with biased conversion strategies. The size of the euro illusion is influenced by trade-offs between accuracy and effort. Consistent with this hypothesis, task importance, time constraints, familiarity with the conversion strategy, complexity of the conversion strategy, mood, and attitude towards the country or the currency all influence the size of the euro illusion.

Capital Flows Adjustment Policy in Slovenia: Assessment of Design and Efficiency

During the last decade many Central and East European (CEE) countries experienced strong foreign capital inflows. Slovenia was one of them. Sources of inflows in Slovenia changed radically, even though privatisation-driven inflows were absent, in contrast to other CEE countries. Since such inflows could have significant adverse effects on the performance of the economy, some policy measures were taken. This article presents an empirically tested assessment of policy for adjustment to surges in capital flows during the last decade. Speculative reversals, a decline in external competitiveness, exchange rate appreciation, loss of control over the monetary base and inflation are just some of the detrimental effects that can be provoked by surges in capital flows if the economy suffers from fundamental sectoral deficiencies. Empirical results indicated that Slovenia quite successfully mitigated the listed effects of excessive foreign exchange inflows. Efficient combination of direct and indirect adjustment methods succeeded in preventing the still vulnerable economy from suffering a major financial crisis and nominal currency appreciation (which was not the case in some other CEE countries) although there was some real appreciation.

The euro: The logic and inevitability of UK adoption

A competitive, smoothly functioning financial system is widely accepted as a prerequisite for realising an economy's growth potential. Modern growth theories have broadened their focus beyond the rate of interest as the means of equilibrating savings and investment to the contribution that efficiently operating financial markets make to underlying growth rates. The successful introduction of the euro marks an historic and significant step towards the achievement of a competitive, smoothly functioning pan-European integrated financial system. The elimination nominal currency risk for participants and reduced transaction costs are only the start of a continuing dynamic process that is steadily reducing asymmetries and increasing contestability. More generally a single currency and a smoothly functioning pan-European financial system are necessary counterparts to a single EU market in goods, services, labour and financial capital. This paper advances the argument that the integration of the EU's financial markets should be viewed as part of a longer-term process of economic and political integration in Europe. The UK is unable to stop this trend and UK business in general, and the UK financial markets in particular, would be wise to acknowledge these forces and to start to work with them. Marketing UK financial services with a view to UK membership of EMU would not only align marketing with the flow of history, but also it offers the prospects of a greater longer-term return.

The Euro: Limited Impact, Great Promise

Sixteen years ago, when it became clear that we would be staying for some time in the U.K., my husband and I decided we should buy a house rather than continue to rent. We were faced with the prospect of bringing money over from the U.S. and converting our dollars into British pounds. Fortuitously, we benefited from the exchange rates at the time. A strong dollar and weak pound meant that our dollars converted to pounds almost on a one-for-one basis. Several months later, in fact, the exchange rate actually hit one-for-one. Two years later, however, the exchange rate was two for one: the dollar had weakened and the pound strengthened, so it took two U.S. dollars to buy one British pound. All of which goes to show that currencies have cycles, just like petrochemicals, economies, and hemlines. Which is why I am not wringing my hands over the condition of the euro—the nominal currency ...

Misalignments of real exchange rates and the credibility of nominal currency bands

Misalignments of Real Exchange Rates and the Credibility of Nominal Currency Bands. — This paper analyzes a sticky-price target zone model in which realignment risk is modeled endogenously as a function of the degree of real exchange rate misalignments. The implications of the model are used to investigate the credibility of selected nominal ERM exchange rate bands. We find that a lack of credibility of the ERM currency bands occurs mostly in countries with substantial swings and persistent misalignments of real exchange rates. These findings suggest that the major real appreciations in some European bilateral real exchange rates between 1987 and 1992 have been pivotal in triggering the ERM currency crises of 1992 and 1993.

The effects of real exchange rate depreciation on stochastic producer prices in low‐income agriculture

AbstractThis paper considers the effects of real exchange rate depreciation on stochastic agricultural producer prices in low‐income agriculture. Conventional wisdom, that real depreciation achieved through nominal currency devaluation stimulates tradables production, does not universally hold in the presence of stochastic prices. In fact, real depreciation is only stimulative in two cases–importables that remain importable and nontradables that become exportable. GARCH estimation of time‐series price data on several commodities from Madagascar support the hypotheses generated by the analytical model.