Practice Of Central Banking Research Articles

Using the balance sheet framework for monetary analysis: The case of China

AbstractMonetary analysis has been out of fashion lately. However recent economic and inflation dynamics call for renewed attention. Since 2021, broad money growth has been associated with high inflation and overheated production. Central banks and academia should pay more attention to monetary analysis to understand the economic dynamics and formulate better monetary policy. This article briefly reviews the monetary analysis practices of major central banks and then focuses on China as a case study. We set out the features of the balance sheet of depository corporations, and use it as a basic framework for monetary analysis. There are seven money‐supply channels of broad money, which fluctuate because of seasonality, demand conditions, regulation, and financial institutions micro‐managing indicators. Any change of broad money will be reflected through the balance sheet. Applications include analysing long‐term evolution of money supply channels, analysing and predicting monetary growth, recording major financial incidents, and so forth.

The Nature, Function, and Independence of the National Bank of Ethiopia: A Comparative Analysis in Light of International Practices

A central bank is an autonomous institution that is mainly bestowed with the mandate to ensure the maintenance of price stability by formulating and implementing monetary policy. To fulfill its purposes, the law should make sure that the CB is independent of external influence. Accordingly, the NBE is established to act as the central bank of Ethiopia, empowered to deliver on multiple objectives, including price and exchange stability. Nonetheless, it is evident under its legal framework that the requirements for institutional, functional, and personal independence of the NBE are disregarded. Hence, having this problem in mind and considering the research gap in the particular area, the study attempted to review relevant legal instruments of the NBE, assessing them against parameters of institutional, functional, and personal independence; selected countries’ laws, and the expert opinions of NBE officials and IMF expert to make the required analysis about the nature, functions, and independence of the NBE. Consequently, the study revealed impediments related to the institutional, functional, and personal autonomy of the bank. Thus, concerning institutional independence, there is a lack of clear provisions protecting the bank from government and other entities' influence. The absence of hierarchy between its objectives, the dominance of government representatives in the BoD, the absence of legal limitations on the advances to be provided to the government, and ambiguity as to the role of monetary policy formulation and oversight roles of the BoD are the manifestations of the absence of functional independence. Whereas, in terms of personal autonomy lack of provisions stipulating the security of tenure, qualification criteria, and procedure for the appointment and dismissal of the BoD members, Governor, and Deputies are evident. Having identified these concerns under the current laws, the researcher recommends the relevant revisions of the laws to address the enumerated impediments in line with the best practices of central banks.

(Mis)Alignment between observed and expected monetary policy: The case of Brazil

The economic agents’ perception of the monetary policy might not coincide with the central bank conduct. We investigate this issue by using both actual and expected data identified by professional forecasters for Brazil, an emerging economy that has long adopted the inflation-targeting regime. We estimate observed, expected, and forward-looking interest rate rules, apply Full-Information Rational Expectations (FIRE) tests, assess restrictions implied by models of information rigidity, and perform several robustness checks. The estimated policy rules respond to inflation deviations and output gap according to theoretical grounds. Professional forecasters, however, do not believe in aggressiveness to fight inflation in longer forecasting horizons, while FIRE tests unveil information rigidity in the short run. There is a misalignment between the Central Bank practice and the private agents’ perception of the monetary policy in the long but not in the short run, suggesting unanchored long-term inflation expectations.

Monetary Policy Challenges and Strategies in the Globalization: An Analysis of the Federal Reserve's Approach to the Trilemma

This study explores the Federal Reserve's (Fed's) approach to the financial trilemma in the era of globalization, emphasizing the trade-offs between monetary policy autonomy, exchange rate flexibility, and open capital markets. It delves into the challenges posed by increased global financial integration and the effectiveness of traditional and innovative monetary tools. The paper advocates for the adoption of a macroprudential policy framework to enhance financial system stability without compromising policy objectives. The findings highlight the Fed's strategic use of macroprudential measures alongside conventional tools to navigate the trilemma, illustrating the importance of flexibility and innovation in central banking practices amidst global financial complexities.

Leviathan financialized?

AbstractIn The Rise of Central Banks, Leon Wansleben provides a perceptive account of the evolution of central banking practices in the United States, the United Kingdom, Germany, and Switzerland from the 1970s through the subprime mortgage crisis and the global pandemic. Focusing on the concrete practices of monetary policymakers, Wansleben usefully explores the relationship between the development of novel techniques of monetary policy implementation and the financialization of the economy, with the paradox that the central bank appears more powerful, but exercises this power in a system that is ever more prone to crisis. While agreeing with the broad strokes of Wansleben’s analysis, I raise questions about the nature of the ‘infrastructural power’ exercised by the state through financial markets, suggesting that the growing salience of the central bank in the policymaking apparatus should not be conflated with its independent influence over the direction of economic policy.

Merenje otpornosti bankarskog sistema primenom Teksas racija

The issue of banking sector resilience is one of the most exploited after the global financial crisis. Competent authorities and central banks worldwide conducted a series of actions to strengthen their systems and made them more resilient to extraordinary events. For that purpose, there were conducted stress tests leading to results for the improvement of the central bank's supervisory activities and practices. Also, the analysis of banking sector resilience should be complemented with other measures, which are also treated as early warning indicators. Texas ratio is one of the early warning indicators that could indicate the banking system's stability through the analysis of non-performing loans as a portion of "toxic" assets in banks. A high percentage of non-performing loans poses a serious threat to banking institutions' ability to survive, hence it is crucial to monitor them and find effective solutions. The authors of the research stress the importance of using the Texas ratio when evaluating the resilience of the banking industry. The main findings of the paper are reflected in a positive correlation between NPL and Texas ratio and recommendation for Texas ratio's widespread usage in practice.

Monetary policy framework in Sri Lanka and its impact on the financial sector: A review

Monetary policy is a prominent stabilization mechanism often used to accomplish price and economic stability in a country. The success of monetary policy depends on the operating economic environment, the institutional framework adopted, and the choice and mix of the instruments used. The aim of this paper was to review the evolution of the monetary policy framework in Sri Lanka and its impact on the financial sector. The review is important, and monetary policy is intended to impact aggregate spending in the economy to contribute to the goals of full employment, price stability, sustainable economic growth, and balance of payments equilibrium. The paper reviewed more than twenty-five research and review papers using a thematic approach. The paper explains the historical evolution of monetary policy regimes in Sri Lanka and the reasons for adopting various monetary and exchange rate policy regimes from time to time. The review considers national and international studies on monetary policy regimes and their impact on the financial system. The paper concludes that the Currency Board could not influence the money supply in any way, and until the adoption of open economy policies in 1977 under the fixed exchange rate regimes, the Central Bank had no control over domestic inflation. The review also identifies that flexible inflation targeting is the international best practice of Central Banking, and flexible inflation targeting enables the maintenance of low inflation, thereby helping economies achieve a high and stable growth path. However, it emphasizes that it should be maintained sustainably subject to several conditions through government intervention.

Assessing Effectiveness of Structural Monetary Policy in China

Abstract Structural monetary policy (SMP)—differentiated policy action targeting specific economic activity— has become more frequently applied by major central banks lately, although the practice of developmental central banking has been in existence for quite some time. The effectiveness of such structural monetary policy, however, has not been adequately evaluated. In this paper, we attempt to provide a comprehensive analysis of SMP introduced by the People's Bank of China and also to offer a broad framework for thinking about SMP. We first document the brief history and main components of China's SMP and estimate the narrow- and broad-measures of SMP accounting for 17.9 percent and 27.9 percent of base money, respectively, at the end of 2022. We then discuss two key factors determining success of SMP: bank credit flows to the targeted area and risk implications for banks. By applying the difference-in-difference and panel data analysis approaches using a monthly data set of city commercial bank loans, we evaluate the impacts of targeted required reserve ratio (RRR) cuts in 2019 and 2020 on small- and medium-sized enterprise lending. No statistically significant impact is found, whether in the short run or in the long run, and whether for medium-sized enterprises or for micro and small businesses). We conclude that, as no statistically significant impact of targeted RRRs are found, SMP's effectiveness, if exists at all, might be temporary; when facing impaired monetary policy transmission, it is important to conduct careful analysis of its effectiveness and sustainability.

Комітети монетарної політики в умовах спалаху пандемії коронавірусу

Introduction. In conditions of systemic shocks, such as the coronavirus pandemic, monetary policy decision-making requires collegiality. Monetary policy committees (MPCs) are a successful institutional solution in the conditions of information asymmetry and available alternatives for responding with monetary measures to dynamic changes in the economy and shocks. Problem Statement. In Ukraine, at the level of the central bank and in the scientific opinion, the role and status of the MPCs in ensuring financial stability is underestimated, which is perceived more as a working body of the Board of the National Bank of Ukraine (NBU). The formation of its composition which includes only top managers of the NBU does not guarantee against the adoption of biased or short-sighted decisions, which can lead to negative consequences for economic growth. There is a need to bring the principles of this collegial body into line with the best practices of central banks. Purpose.To generalize international experience in the institutional development of national central banks in the direction of the corporate structure of the monetary policy committee to ensure greater efficiency of its work and the application of best practices in Ukraine. Methods. Content analysis, methods of scientific abstraction, comparative analysis of statistical information published by central banks of countries that are not part of the European Central Bank system were used. Results. The coronavirus pandemic did not cause significant changes in the organization of committee activities, but it increased the importance of involving external experts to assess and forecast the situation. The analysis of the biographical data of such persons showed that they are highly qualified specialists, recognized in the country and by the international community. In the decisions of individual political bodies the reference to the expectations of the market participants (for example, the prediction of the decision related to maintainance , increase or decrease of the discount rate) deserves special attention as well as the requirement for the members of the body to observe a period of “silence” for at least one week, which means refraining from comments on the statement of position before the meeting. Of course, the practice of involvement the representatives of the Ministry of Finance in meetings of the committee without voting rights is of interest. Conclusions. Monetary policy committees work primarily to ensure price stability, but with a perspective for economic development. The main functions of MPCs in most European countries are not limited to setting the discount rate, but cover reserve requirements, approval of liquidity support programs and refinancing of banks, operations of the central bank in the foreign exchange market and with securities. For Ukraine, it is considered optimal to form MPCs not under the Board, but under the National Bank itself in order to raise its status to the level of a decision-making body. For this amendments should be made to the Law “On the National Bank of Ukraine” and regulations or provisions on the MPCs should be developed. The participation of external experts in the committee is necessary for making informed decisions. Their level of qualification should be confirmed by a doctorate in economics or finance and the status of professor, a solid list of scientific publications and experience of participation in international research. Management experience in public financial corporations, central banks and departments or large financial institutions is desirable. In our opinion, the participation of politicians in the committee is inappropriate, because in the current conditions it will only undermine the independence of the central bank.

J.M. Keynes’ Tract on Monetary Reform (1923) After 100 Years—A Retrospective

Abstract This article revisits the main themes and theories that Keynes presented in the Tract on Monetary Reform one hundred years ago. It argues that the Tract remains highly relevant today for mainly three reasons. First, the Tract remains relevant as one of the four major monetary works that represent the evolution of Keynes’ monetary thought. Second, the Tract contains theories that were and continue to be important in their own right, especially since they may not have received any attention in the General Theory. Third, the Tract developed policy ideas and proposals that describe common practices of central banks around the world today. In fact, one hundred years later, it is fair to say that modern civilization includes Keynes’ mantra of the Tract as one of its tenets: that a managed currency is inevitable.

Foreign exchange intervention and the Dutch disease under incomplete information

This study examined the effectiveness of foreign exchange intervention as a policy response to the Dutch disease episode in an oil-exporting developing economy when the monetary authority is uncertain about the persistence of oil price shocks. Based on the results of the different scenarios modelled, the policy response to the Dutch disease will have to go beyond foreign exchange intervention to embrace structural reforms that will address the self-replicating causes of the continuous decline in manufacturing output. There is, however, still room to explore the optimal foreign exchange intervention (FXI) policy in response to the Dutch disease at least in the short run. The optimal FXI policy when the monetary authority has incomplete information on the persistence of an oil price shock; that is, whether it is a temporary or a permanent shock, would be a sustained accumulation of reserves (preferably beyond 5 quarters) to lean against appreciation pressures on the real exchange rate and prevent the decline of manufacturing output. Also, the results show that conventional monetary policy outperforms central bank intervention over the entire period adopted (from 1983Q1 to 2020Q4) but was outperformed by foreign exchange intervention when a sub-sample analysis was performed (for 1998Q1 to 2020Q4). This reflects the impact of the practice of Central Banks in developing economies that began accumulating reserves actively in the early 2000s. There is, however, a need for better coordination between both policy instruments in dealing with the Dutch disease episode.

Pakistan’s Monetary Policy: Some Fundamental Issues

Over the last three decades, the landmark transformation of central banks from secrecy to openness and transparency has significantly enhanced their performance to successfully anchor inflation expectations and achieve price stability. The extent of such a transformation of the State Bank of Pakistan (SBP), especially in terms of statutory objectives, monetary policy mandate, conflicts of interest, disclosures, and dissemination of effective public economic information is assessed vis-à-vis the current popular central banking practices. The assessment indicates that the SBP is yet to be transformed to be able to achieve price stability which is a cornerstone for the achievement of sustainable economic growth. On the statutory front, such a transformation requires amending the SBP Act 1956, in line with the statutes for the best monetary policy frameworks by; (1) making price stability as the overriding objective of the SBP; (2) putting in place a clear mechanism for its accountability against price stability, consistent inflation targets, and; (3) elimination of the cushion for government‘s involvement with the monetary policy decision making processes. Some of the other areas like, institutional capacity building of the SBP, in terms of the relevance and level of the academic qualification, research profiles, and experiences of the Board, higher as well as lower tier management need special attention. Such transformations may not only enhance assimilation, creation, sharing, and funnelling of existing as well as new knowledge into monetary policy formulation, but may help change the static mindset at the SBP, hence allowing the institution to flourish. JEL Classification: E5, E52, E58 Keywords: Statutory Objectives, Conflicts of Interest, Disclosures, SBP

CEE EU Central Banks’ Policy during the First Wave of COVID-19

Abstract Faced with COVID-19 crisis, central banks have once again become one of the key players in the economies. The aim of this article is to analyse the actions of Central and Eastern European central banks within all their roles (monetary policy, micro-and macroprudential policy, deposit guaranteeing and resolution) during the first coronavirus wave. The analysis shows that they were active in various fields, not only those that were traditionally always assigned to central banks (i.e. monetary policy, although this was the major field of activity). Scope of the intervention naturally depended on the shape of the national financial safety net. At the same time, the use of monetary policy tools depended on the adopted monetary policy strategy. Practice of central banks’ actions shows that central banks with a wide range of monetary tools reacted later. It seems that the scope and intensity of the use of monetary policy tools was not influenced by the general role of the central bank in the financial safety net. The monetary toolkit used by banks was based on a standard set of instruments with modified conditions of application (scale, transaction parameters and their type, collaterals and counterparties). Although transactions with specific parameters were sometimes implemented for the first time, they can still be included in the framework of classic monetary policy tools. In areas other than monetary policy, central banks were much less active. The most disturbing seems to be the passivity in the field of macroprudential policy.

Evolutions and trends regarding the monetary and fiscal-budgetary policy in Romania

Abstract The purpose of this paper is to provide a presentation and an analysis of the evolution and trends in monetary and fiscal policy in Romania. There will be a brief presentation of the evolution and objectives of monetary policy as well as the evolution of fiscal-budgetary policy. In order to respond to similar requirements outlined from the perspective of the monetary policy in Romania, this paper aims to expand the area of information that monetary analysis can provide in the current context of the Romanian economy. At the same time, the analysis, the indicators regarding the fiscal-budgetary policy (expenditures, revenues, and the budget deficit), as well as the indicators of the monetary policy (inflation rate, exchange rate and public debt) in Romania during 2014-2020 are presented. Much of the economic theory as well as recent practice of central banks assigns to currency and monetary analysis an important role in the formulation of monetary policy. It follows from the relevance of the information provided to the central bank by a comprehensive monetary analysis- in which the results generated by statistical and econometric techniques are complemented by expert judgment- the most significant being information on price developments, risks to disinflation / price stability, as well as the dynamics of economic growth.

Islamsko centralno bankarstvo u teoriji i praksi

Thanks to their role as creators and implementers of monetary policy, central banks in most modern countries have the status of key financial institutions and pivots of financial system stability. During the centuries of evolution of central banking, numerous models and instruments of monetary policy were developed, the application of which depended largely on the political environment and the dominant economic model in specific countries. Unlike conventional central banking, Islamic central banking has been in global economic practice for only a few decades. An authentic and Shariah-compliant model of Islamic central banking is still in its infancy. Therefore, the practice of Islamic central banking is largely based on the application of instruments of conventional central banking, which, according to Shariah compliance, are used in their original or modified form or are excluded from use. In this paper, we will present the development path of Islamic central banking, the goals and obligations of Islamic central banks, a set of Shariah-compliant monetary policy instruments, the practice of Islamic central banking in certain countries, and limitations for the efficient functioning of Islamic central banks in practice.

Measuring the Climate Risk Exposure of Financial Assets : Methodological Challenges and Central Bank Practices

In order to understand climate-related risks and opportunities, the availability and transparency of reliable financial information is essential. In this regard, the financial sector plays a special role owing to its ties to other economic sectors, and the exposure of financial institutions highlights the responsibility of central banks. This paper uses the literature related to environmental sustainability reporting as well as practical experience to describe the challenges encountered in assessing the green risks of financial assets (absence and heterogeneity of data, differences in definitions and requirements, lack of a uniform methodology, limits of rating schemes) and also details the climate risk measurement methodologies and practical solutions employed by central banks publishing their own climate-related financial disclosures, i.e. the Bank of England, the Banque de France and the Magyar Nemzeti Bank.

Monetary incentives and fiscal policy mutual influence

The article considers the problems and practice of using the tools of monetary and fiscal stimulation of the economy. The main problems of the application of monetary instruments in practice in emerging markets are identified. The author paid special attention to the definition of classical monetary policy instruments and their role in economic growth in emerging markets. Critical assessment of the role of monetary policy instruments in stimulating economic growth is based on the practice of central banks in emerging markets. Recommendations for the analysis of the efficiency of monetary transmission are given. Problems of efficiency of application of fiscal stimulus instruments in emerging markets are raised. The mechanisms of the dependence between fiscal and monetary policies and the strengthening of such dependence in the case of a significant informal sector of the economy and an underdeveloped financial market are demonstrated. The author not only points out the need for coordination in choosing between monetary and fiscal policy but also advocates the idea of having an independent arbitrator between monetary and fiscal authorities in developing countries. The article also focuses on the analyzing algorithm of the use of monetary policy instruments for economic growth effectiveness. The conclusions made in the article will be especially useful for those who are interested in the issue of optimal choice between monetary and fiscal instruments to stimulate economic development in emerging markets.

НЕЙТРАЛЬНА ВАРТІСТЬ ГРОШЕЙ У ПРАКТИЦІ МОНЕТАРНОГО РЕГУЛЮВАННЯ

Проблематика оцінки рівня нейтральної процентної ставки є центральним питанням у процесі теоретичного обґрунтування прийняття рішень щодо процентної політики в практиці центральних банків. У результаті опрацювання теоретичних джерел, дослідницьких матеріалів міжнародних організацій та центральних банків систематизовано фактори нейтральної процентної ставки, узагальнено методи її оцінки, виявлено їх переваги та недоліки. Фактори нейтральної ставки систематизовано за принципом їх впливу на попит чи пропозицію грошей в економіці. Встановлено, що єдиного загальноприйнятого теоретико-методичного підходу до визначення нейтральної ставки в сучасній практиці не існує. Широка варіація методів з різним ступенем покладання на теоретичну основу (від суто математичних технік фільтрації до складних макроекономічних моделей загальної рівноваги) створює поле для нових науково-практичних досліджень. З’ясовано, що ключовим дискусійним питанням у моделях оцінки нейтральної ставки є формалізація співвідношення між ефектами зовнішніх та внутрішніх чинників, що є особливо важливим для країн з малою відкритою економікою. Увагу приділено методу оцінки нейтральної ставки на основі правила непокритого процентного паритету, що застосовується в національній практиці монетарного регулювання. Виявлено системні вади даного методу на основі дослідження його теоретичних засад і результатів практичного застосування в умовах української економіки. Обґрунтовано доцільність запровадження в практику монетарного регулювання України альтернативного методичного інструментарію оцінки нейтральної ставки на основі розробок Т. Лаубаха і Дж. Вільямса з адаптацією до умов відкритої економіки, що дозволить посилити роль внутрішніх факторів розвитку, зокрема в зміні потенційного ВВП і заощаджень як важливих детермінантів нейтральної вартості грошей.

Financial cycle − A critical analysis of the methodology for its identification

Abstract While the legitimacy of the concept of the financial cycle (as distinct from the business cycle) in research and economic policy after the experience of the global financial crisis raises no concerns, the methodology for its application has become a subject of discussion. The purpose of this article is to indicate which research methods dominate in identifying a financial cycle and which methodological traps accompany them. The low level of critical perspective on the methods used to identify cycles often results in conclusions that have no economic justification and may result in erroneous decisions in economic policy and central bank practice. The case study carried out in the article confirms that the key elements in identifying a financial cycle are part of a long-term series covering at least two lengths of the financial cycle. In addition, because the results may be sensitive to the type of filter used, it is important not to rely on a single variable but rather to build indexes that take into account a number of them (including those obtained using filtration methods).

Digital Ruble of the Central Bank of the Russian Federation

The article is devoted to the study of a new financial instrument — the digital currency of the Central Bank of the Russian Federation. The article examines the reason for the emergence of the Central Bank and its difference from cryptocurrency, analyzes the practice of central banks of foreign states in the development and implementation of digital currencies in the financial system, analyzes the potential risks and benefits associated with their emission, as well as its consequences for the banking sector and monetary politicians.The logic of the article is based on the format of the discussion of the report of the Central Bank of the Russian Federation “Digital Ruble. Public Consultation Report”. In the context of the Central Bank of the Russian Federation report, the article analyzes:two possible options for the emission of the Central Bank in the form of digital tokens and accounts on the settlement accounts of the Central Bank;several possible models of central bank digital currency and technologies for their imple-mentation;competitive advantages or disadvantages of the payment system of the Central Bank of Securities in comparison with traditional banking systems.The article substantiates the position that the payment system of the Central Bank of Securities in comparison with traditional banking systems has no competitive advantages. There-fore, the digital currency of the central bank is not very attractive for economic entities, which limits or even prevents its implementation into practice.The way out of the current situation is to use the Central Securities Market in the field of government payments, thereby increasing the transparency of payments.The practical implementation of the digital currency of the central bank can start with state financing of investment projects in digital rubles, and then on a broader scale with budget financing, when all or a limited list of budget recipients will receive budget money in digital rubles. As a result, other economic actors will gradually be drawn into the payment system of the digital currency of the central bank.