Reserve Assets Research Articles

Internationalization of the Currencies of BRICS Countries.

The ongoing large-scale transformation of the global economy, caused primarily by the economic recovery of the leading developing countries, forms a multipolar map of the world with new centers of power—the BRICS countries (Brazil, Russia, India, China, and South Africa). Thanks to their increased industrial and financial power, these countries are among the key players in the international markets for goods, services, and capital, exerting a significant, and sometimes decisive, impact on their functioning. However, it would be premature to say that in the coming years the representatives of this association will be able to achieve a balance of power in monetary and credit relations with the United States and the European Union, overcoming their long-term dominance in world finance. Achieving such a balance will become possible only as the monetary units of the BRICS countries turn into influential reserve assets that can squeeze the US dollar and euro in servicing world economic relations and create large international financial centers in them that can compete on equal terms with London or New York.

Cross-border Capital Flows in Russia: Prospects for Changing their Internal and Geographical Structure

The relevance of the study is due to the growing influence of external factors on the structure of cross-border capital flows associated with Russia. The aim of the study is to identify the main changes in the internal and geographical structure of international capital flows in Russia, trace their connection with the state economic policy and make practical proposals for improving their internal and geographical structure in Russia. The author uses statistical methods related to the calculation of individual indicators and the analysis of statistical data, the study of international experience. The analysis of the calculated structure of flows and stocks of foreign investment in 2007-2019 proves that the internal structure had an increase in the importance of direct investments in the composition of liabilities and a decrease in the role of reserve assets in the composition of assets. Offshore and related jurisdictions dominate in the geographic structure of direct investment, while the structure of reserve assets has shifted from the United States to Asian countries (China and Japan). International experience indicates the development of new approaches to the regulation of international capital flows, including measures of macroprudential policy. The author made a conclusion about the ineffectiveness of the current economic policy in regulating the internal and geographical structure of cross-border capital flows in Russia and about the prevailing influence of administrative measures by the external players. To improve the structure of international capital flows in Russia, the author suggests using separate currency restrictions, macroprudential policy measures, deoffshorization policy, as well as targeted insurance of external risks for Russian investors.

What Drives U.S. Treasury Re-use?

<ns2:p>We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's secured funding and their outright holdings. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, U.S. dealers' re-use increases when demand to source on-the-run Treasuries is high, and both types of dealers' re-use can alleviate safe asset scarcity. Finally, we document a sharp drop in Treasury re-use at the onset of the COVID-19 pandemic, with a subsequent reversal after the Federal Reserve's intervention to support market functioning.</ns2:p>

What drives the commodity-sovereign risk dependence in emerging market economies?

Using daily data for 34 emerging markets in the period 1994–2016, we find robust evidence that higher export commodity prices are associated with lower sovereign default risk, as measured by lower EMBI spreads. The economic effect is especially pronounced for heavy commodity exporters. Examining the drivers, we find that, first, commodity dependence is higher for countries that export large volumes of commodities, whereas other portfolio characteristics like volatility or concentration are less important. Second, commodity-sovereign risk dependence increases in times of recessions and expansionary U.S. monetary policy. Third, the importance of raw material prices for sovereign financing can likely be mitigated if a country improves institutions and tax systems, attracts FDI inflows, invests in manufacturing, machinery and infrastructure, builds up reserve assets and opens capital and trade accounts. Fourth, the country’s government indebtedness or amount of received development assistance appear to be only of secondary importance for commodity dependence.

Analyzing the financial and economic development of contemporary Russia

Subject. The article addresses the financial and economic development of Russia. Objectives. The focus is on identifying the essence of and conditions for financial and economic development of Russia. Methods. The study rests on the systems approach, using the method of statistical analysis. Results. The performed analysis unveiled an increase in the growth rate of reserve assets due to the negative growth rate of net errors and omissions. This enabled to maintain the growth rate of the current account (with the exception of reserves and related items), increase the issue and coupon yield of federal loan bonds, and reduce the growth of nominal GDP and investments, and a fall in domestic demand. The study found that against a backdrop of a decrease in the specific weight of M0 in M2, there was an increase in the number of credit institutions that generate profit, as well as negative growth rates in the financial account, derivative financial instruments (except for reserves), stock options, capital flows, and credit. I revealed a negative trend in the decline of the current account indicators caused by the active use of derivative financial instruments (except for reserves) and stock options. Conclusions. The essence of and conditions for Russia's financial and economic development are determined by the activities of the Central Bank and the Ministry of Finance, which apply an accounting approach to eliminating the manifestations of global changes in the current form of the world order.

Analyzing trade and financial relations in Russia today

Subject. The article discusses trading and financial relations of today’s Russia. Objectives. The article is to determine requirements for trading and financial relations to progress in Russia today and evaluate how they influence the economic growth. Methods. The study is based on the systems approach and the statistical analysis. Results. Having analyzed trading and financial relations, I found what can give an impetus to the contemporary economy in Russia, i.e. oil prices, related risks. The article demonstrates that government bonds (federal loan bonds) cushion and set off an increase in the foreign exchange rate. The dynamics of the oil price and the issue of federal loan bonds shape the environment where trading and financial relations evolve in Russia today, i.e. export prices for natural resources outgrowing prices for some commodities; a stalling growth in the acquisition of financial assets, debt instruments and a growth in liabilities, equity and shares of mutual funds; a growing pace of long positions of forward, futures, options contracts due to a slow down in short positions; rising pace of official reserve assets. As long as the international trade slows down and the global recession begins, the existing trading and financial relations resulted in a palpable economic growth. Conclusions and Relevance. Opportunities for the development of trade and financial relations in contemporary Russia are conditioned by the changing world order, which determines the dynamics of economic growth. The findings expand the knowledge and create new competencies of governmental authorities when making managerial decisions to ensure the effective design of the Russian economy in terms of the current trading and financial policy.

What You Really Need to Know about the SDR and How to Make it Work for Multilateral Financing of Developing Countries

As of this writing, the Trump Administration has blocked a proposed new allocation of the unique reserve asset issued by the International Monetary Fund (IMF), called the Special Drawing Right (SDR). The proposal has widespread support around the world because it can help ease the financial burden of addressing the Covid-19 pandemic in developing countries and the economic collapse that accompanies it. Moreover, SDRs that sit idle in the reserves of rich countries can be used to financially support developing countries through multilateral institutions. In this way, fiscally strapped donor countries can significantly increase their support for development assistance. However, SDRs are quite esoteric and it seems that the case for a new allocation may be strengthened through a better understanding of what is involved, which is the aim of this paper.

Russia and Financial World: on the Threshold of System Transformations

The modern global financial system is based on unlimited dollar issuance, which is backed by a key reserve asset – US debt obligations. The concept of official foreign exchange reserves promoted by the IMF puts in a privileged position the countries with reserve currencies, primarily the United State. This concept has exhausted the possibilities for productive investment of the savings of the rest of the world. As a result, the savings of the periphery of the global economy are directed to the consumption and speculative spheres. Global financial crises has proved – despite speculative activities banks have priority support from key central banks. Developing countries objectively claim a parity distribution of the benefits and costs of financial globalization, as they play an increasingly important role in global value chains. As a donor of the global financial system, Russia is practically not involved in the distribution of profits in the global financial market. As the largest supplier of raw materials, intellectual and financial resources, Russia requires new solutions in the field of international monetary circulation.

Macroeconomic Effects of Large-Scale Asset Purchases: New Evidence

We examine the macroeconomic effect of large-scale asset purchases (LSAPs) and forward guidance (FG) using a proxy structural VAR estimated on data through 2015, where the stance of the LSAP policy is measured using primary dealer expectations of the Federal Reserve's asset holdings. Monetary policy shocks are identified using instruments constructed from event study yield changes, and additional assumptions are employed to separately identify LSAP and FG shocks. We find that unexpected expansions in the Federal Reserve's asset holdings during the ZLB period between 2008 and 2015 had significant expansionary effects on the macroeconomy, with real activity and inflation rising and unemployment declining notably following the shock. The policy accommodation appears to be transmitted to the economy both through financial markets-including Treasury yields, credit spreads and equity prices-and through bank lending. The effects on Treasury yields and term premiums appear to be longer-lived than previously documented, while the effects on credit spreads and especially bank lending also appear persistent. These results appear fairly robust to alternative identification and econometric methodologies, alternative policy indicators and instruments, and controlling for any possible Federal Reserve information effect. A counterfactual analysis shows that absent the LSAP3 program implemented between late 2012 and 2014, CPI inflation would have been about 1 percentage point lower, while the unemployment rate would have been about 4 percentage points higher, by the end of 2015.

Structural change in oil reserve asset management as a factor of federal budget income

Structural change in oil reserve asset management as a factor of federal budget income

Macroeconometric Assessment of Monetary Approach to Balance of Payments in a Small Open Economy: The Nigeria Experience

Monetary approach to balance of payment establishes a link between foreign reserve assets and money supply. This link is important for managing balance of payment disequilibrium through adjustment of monetary aggregates. This study relies on the (Polak, 1957;1997) monetary model with data from 2007:Q1 to 2018:Q4 to examine the link between monetary factors and balance of payment in Nigeria. To circumvent simultaneity, the reduced form coefficients of the structural form of the Polak model are estimated using Two Stage Least Squares (TSLS) technique, while the structural parameters are recovered from the estimated reduced form coefficients. The results are enriching and robust. The Johansen cointegration procedure suggests a long run relationship among the macroeconomic variables in the balance of payment function. The estimated balance of payment model reveals that domestic credit is statistically significant and negatively related to foreign reserve assets, implying that balance of payment is a monetary phenomenon in Nigeria. The velocity of money circulation and the marginal propensity to import are approximately 120 percent and 14 percent, respectively. The study therefore recommends that the monetary authority should consider the use of domestic credit for management of balance of payment disequilibrium. It is also pertinent to increase domestic credit to grow the economy since such action will marginally decrease external reserve assets through increase in import, however, the net effect will enhance the overall economy.

What Drives U.S. Treasury Re-Use?

We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier: the ratio between a dealer's secured funding and their outright holdings. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, U.S. dealers' re-use increases when demand to source on-the-run Treasuries is high, and both types of dealers' re-use can alleviate safe asset scarcity. Finally, we document a sharp drop in Treasury re-use at the onset of the COVID-19 pandemic, with a subsequent reversal after the Federal Reserve's intervention to support market functioning.

Managing Stablecoins: Optimal Strategies, Regulation, and Transaction Data as Productive Capital

Stablecoins rise to meet the demand for safe assets in decentralized finance. Stablecoin issuers transform risky reserve assets into tokens of stable values, deploying a variety of tactics. To address the questions on the viability of stablecoins, regulations, and the initiatives led by large platforms, we develop a dynamic model of optimal stablecoin management and characterize an instability trap. The system is bimodal: stability can last for a long time, but once stablecoins break the buck following negative shocks, volatility persists. Debasement triggers a vicious cycle but is unavoidable as it allows efficient risk sharing between the issuer and stablecoin users.

EXCHANGE RATE CHANNEL OF TRANSMISSION MECHANISM OF THE NBU’S MONETARY POLICY

The essence of exchange rate channel of transmission mechanism of the monetary policy is considered. Pearson’s, Spearman’s, and Kendall’s correlation coefficients were applied to calculate the relationship between variables. It is emphasized that the exchange rate channel of the monetary policy transmission mechanism reflects its impact on output and price level due to changes in the exchange rate of the national currency. It is noted that the hryvnia devaluation has always been observed against the background of economic crises and declining exports. In all three cases of sharp devaluation, the crises were accompanied by a significant drop in exports of goods, which reduced the NBU's reserve assets. In general, the NBU conducted interventions to counteract excessive fluctuations in the national currency exchange rate, selling currency during periods of devaluation and buying it during periods of revaluation. In addition, there is an inverse relationship between the discount rate and the official hryvnia exchange rate from January 2015 to October 2019. In other words, the higher the discount rate, the lower the USD price expressed in UAH is. In addition, the Pearson’s correlation coefficients indicate a strengthening of the relationship between the official hryvnia exchange rate against the U.S dollar and the lagged discount rate. In other words, raising the interest rate in the current month will have a long-term impact on the value of the dollar, expressed in UAH. The strongest link between the discount rate and the official hryvnia exchange rate is in the first leg, with the link loosening in the next. The values of the Kendall correlation coefficients show the same as the previous coefficients. First, the relationship between the official hryvnia exchange rate against the U.S dollar and lag values of discount rate is increasing. Second, similarly, the relationship between the USD/UAH exchange rate and the interbank lending rate is increasing. Third, the link between the CPI lag values and the official hryvnia exchange rate is increasing. Fourth, the relationship between the hryvnia against the US dollar and the NBU's interventions is insignificant. Fifth, there is a link between rising exports and the devaluation of the hryvnia against the US dollar. Keywords : exchange rate, transmission mechanism, monetary policy, exchange rate channel, discount rate.

Резервные активы – источники пополнения ресурсной базы банковского сектора и повышения его устойчивости

The paper focuses on the importance of using reserve assets in order to increase the bank financial stability and the banking system as a whole. The essential requirements for reserving commercial banks have been presented. The methods of regulating the required reserves have been studied. The specific features of applying the required reserves in banking activities (reserve requirements and liquidity, monetary policy, reserve requirements as a monetary tool, reserve requirements as a fiscal tool) have been revealed. The schedule of averaging periods of required reserves for 2019 is being considered. The general principles which credit organizations are guided by when creating reserves are the following: obligatory availability of reserves for all credit organizations throughout their existence; forming reserves in relation to liabilities to legal entities and individuals; possibility of removing from the list obligations for which reserves have been created. It has been mentioned that the main objectives of the reserve requirement system are to provide banks with sufficient liquidity and to regulate the money supply. Particular attention is paid to the Central Bank as a reserve requirements regulator. In accordance with the changes of the Central Bank of July 1, 2019, the established standards on reserve requirements for deposits in national currency are set at 4%, in foreign currency at 14%. Manipulating the required reserve rate will provide the Central Bank with the opportunity to adjust the liquidity and solvency both of an individual bank and the entire banking system. The method of averaging required reserves includes the possibility for a commercial bank not to transfer reserves to the Central Bank based on a certain sum 
 of money. The averaging coefficient is set at 0.25 to the standard volume of required reserves

A global stablecoin: Revolutionary reserve asset or reinventing the wheel?

Since early 2019, when Facebook announced its intention to design a payment system based on blockchain technology, the global financial regulatory establishment has begun to take seriously the arguments for disintermediated payment systems. This paper examines the geopolitics, legal concepts and monetary policy that have informed the emergence of ‘global stablecoins’ such as Facebook’s Libra project, central bank digital currencies and the single hegemonic currency (SHC) recently proposed by Mark Carney of the Bank of England. It first analyses private and state-backed cryptocurrencies, and suggests that state-backed cryptocurrencies are more likely to fit the role of true digital currencies. Focusing on the distinctions between central bank digital currencies on a national level and the proposed SHC as a new global reserve asset, the paper sets out the legal structure of the SHC based on the ‘claims’ model, but infers from its similarities to special drawing rights that the full development of such an asset would be opposed by domestic policy interests. Finally, the paper assesses the prospects of the SHC based on the ‘objects’ model. It tentatively concludes that the features of the objects model that distinguish it from the claims model greatly improve its prospects of success. Specifically, the generation of network effect value, as a substitute for the convertibility value of special drawing rights, may be the decisive contribution of blockchain technology to a truly global reserve currency.

This Time is Different: Facebook s Libra Can Improve Both Financial Inclusion and Global Financial Stability as a Viable Alternative Currency to the U.S. Dollar

The propagation of high-magnitude crises since the late 1990s have cost over $30 trillion and pushed about one percent of the world population into poverty. In the aftermath of the 2008 global financial crisis, the worst financial catastrophe of the 21st century, accelerated the speed of money’s inevitable evolution into cryptocurrencies. Blockchain and distributed ledgers are a revolutionary innovation; as antecedents, they could lead to foreseeable and unforeseeable impacts on the definition of central bank money and online payment systems. As with any new technology, Facebook’s Libra as the new kid on the block (but without block) is going to disrupt the existing cryptocurrency models and the ecosystem they have created for a decade. Libra clearly has an advantage over 2,400 cryptocurrencies sprouted since the first successful Bitcoin in January 2009; furthermore, Libra’s vast scale (close to a three billion user base) sets itself apart from even the most dominant Bitcoin with 68% of the market share. Bitcoin’s arduous journey to the stardom in the digital cash world has been constantly subject to immense criticism and the question whether Bitcoin is a digital coin or just an investment asset class has never been put to rest. Facebook assures that at least Libra is not going to have the same predicament as Bitcoin since Libra will be backed by a basket of stable currencies (dollar, euro, pound, and yen) as well as low-risk government bonds and central bank reserve assets; of course, this alone does not shield Libra from market fluctuations and exchange rate risks. Although Libra is promoted to be a very stable digital coin contrary to peers (i.e. Bitcoin), but Libra or its 28-member governing body the Libra Association will not eliminate all of cyberattacks or the default risk of securities and member-firms which happen to be for-profit companies. Libra’s another stability feature, unlike Bitcoin and over 2,400 altcoins, Libra will be a liability of individuals and entities plus it will be backed by a central bank like authority (the Libra Association) responsible for Libra’s stability. The downside is that Facebook has had a troubled past regarding privacy and the exploitation of users’ data; however Facebook assures that Libra will be operated by Facebook’s subsidiary Calibra and sensitive financial data including the Libra account holders’ any part of transaction history will not be shared with Facebook unless authorized by the account owners.

A Simple Sovereign Default Model

A very influential model in the determination of capital requirements for credit exposures is Vacisek’s model. This model underpins the Basel framework for credit exposures of financial institutions. Vacisek’s model uses information on asset correlation and the unconditional mean of the probability of default to derive the conditional probability of default under stress. However, the concept of asset values applies best to corporations rather than to sovereign exposures. We adapt Vacisek’s model to capture the event of a sovereign default that results from a country hitting certain thresholds of economic distress. A reasonable assumption is that a significant drop in foreign reserve assets triggers the default event in a developing country as observed during the 1980s debt crisis, in which highly indebted Latin American countries and other developing regions were unable to repay the debt.

This Time Is Different: Facebook’s Libra Can Improve Both Financial Inclusion and Global Financial Stability As a Viable Alternative Currency to the U.S. Dollar

The propagation of high-magnitude crises since the late 1990s have cost over $30 trillion and pushed about one percent of the world population into poverty. In the aftermath of the 2008 global financial crisis, the worst financial catastrophe of the 21st century, accelerated the speed of money’s inevitable evolution into cryptocurrencies. Blockchain and distributed ledgers are a revolutionary innovation; as antecedents, they could lead to foreseeable and unforeseeable impacts on the definition of central bank money and online payment systems. As with any new technology, Facebook’s Libra as the new kid on the block (but without block) is going to disrupt the existing cryptocurrency models and the ecosystem they have created for a decade. Libra clearly has an advantage over 2,400 cryptocurrencies sprouted since the first successful Bitcoin in January 2009; furthermore, Libra’s vast scale (close to a three billion user base) sets itself apart from even the most dominant Bitcoin with 68% of the market share. Bitcoin’s arduous journey to the stardom in the digital cash world has been constantly subject to immense criticism and the question whether Bitcoin is a digital coin or just an investment asset class has never been put to rest. Facebook assures that at least Libra is not going to have the same predicament as Bitcoin since Libra will be backed by a basket of stable currencies (dollar, euro, pound, and yen) as well as low-risk government bonds and central bank reserve assets; of course, this alone does not shield Libra from market fluctuations and exchange rate risks. Although Libra is promoted to be a very stable digital coin contrary to peers (i.e. Bitcoin), but Libra or its 28-member governing body the Libra Association will not eliminate all of cyberattacks or the default risk of securities and member-firms which happen to be for-profit companies. Libra’s another stability feature, unlike Bitcoin and over 2,400 altcoins, Libra will be a liability of individuals and entities plus it will be backed by a central bank like authority (the Libra Association) responsible for Libra’s stability. The downside is that Facebook has had a troubled past regarding privacy and the exploitation of users’ data; however Facebook assures that Libra will be operated by Facebook’s subsidiary Calibra and sensitive financial data including the Libra account holders’ any part of transaction history will not be shared with Facebook unless authorized by the account owners.

Western Europe and the collapse of Bretton Woods

This article contends that Western Europe played a crucial and overlooked role in the collapse of Bretton Woods. Most scholars highlight the role of the United States, focusing on the impact of US balance of payments deficits, Washington’s inability to manage inflation, the weakness of the US dollar, and American domestic politics. Drawing on archival research in Britain, Germany, the Netherlands, and the United States, this article argues that Western European decisions to float their currencies at various points from 1969 to 1973 undermined the fixed exchange rate system. The British, Dutch, and West Germans opted to float their currencies as a means of protecting against imported inflation or protecting their reserve assets, but each float reinforced speculators’ expectations that governments would break from their fixed parities. The acceleration of financial globalization and the expansion of the Euromarkets in the 1960s made Bretton Woods increasingly difficult to defend.