Reserve Currency Research Articles

Децентрализация денежной системы как способ ухода от резервной валюты — доллара США

The article presents the main directions of the plan for the de-dollarization of the Russian economy, identifies strategic partners in its implementation. A comparative analysis of the centralized and decentralized payment system is carried out. The advantages and disadvantages of the decentralization of the monetary system are emphasized, the trends of its development in Russia are determined. The perspectives of decentralization of the monetary system as a way of abandoning the reserve currency - the US dollar - are analyzed. Proposals are formulated for the further development of the decentralization of the monetary system in Russia.

US Policy on Dollarization of the World Economy

In its essence and content, dollarization is one of the keys and most significant phenomena of modern dynamically developing international monetary and financial relations. There are different theoretical approaches to determining the economic essence and content of the complex and contradictory phenomenon of dollarization. Different scientists have investigated the monetary nature of this phenomenon and have given a comparison of the concepts of official and partial dollarization, based on the degree of economic coverage of dollarization. In this research the process of official dollarization is considered on the example of Eurasian Economic Union (EAEU) member states. The paper examines the scale of financial dollarization in the EAEU member states, where, due to the loss of residents' confidence in the monetary policy and the national monetary unit, the functions of the national currency are partially replaced by the US dollar. Furthermore, the role of the US Federal Reserve in the implementation of dollarization of the foreign economies is analyzed. The article substantiates the intention of the US Federal Reserve to take steps to dollarize the foreign countries' economy in the context of the started process of de-dollarization of the world economy. The most active supporters of de-dollarization are Russia, China, and Iran. Their efforts are aimed at weakening the dominant position of the dollar as a key reserve currency, the currency of international settlements. In the current condition of the world economic development, it is unlikely to expect a weakening of the position of the US dollar, given the role of the US dollar in the trade of oil and petroleum products. The petrodollar system is the basis of the US dominance in the global financial system and the key to the stability of the US dollar. As a result, countries are forced to buy dollars in order to be able to purchase oil on the open market. While the demand for the US dollar will remain at a high level, it is not necessary to talk about the success of de-dollarization and the transition from an American-centered monetary and financial system to a polycentric one in the near future.

Structural breaks, reserve currency and balance of payments constrained growth: a test of Thirlwall’s Law in the UK (1950-2017)

ABSTRACT We apply Thirlwall’s law (Thirlwall 1979) to estimate long run growth in the UK. In particular, we develop a new test allowing for potential structural breaks based on 2SLS to remedy potential weaknesses that existed in previous methods. Our results show the UK had different balance of payments positions over different time periods, and its growth has been constrained over the past two decades. We further elaborate on the pound’s changing role as a reserve currency and how this has affected the UK’s external constraint and growth.

The Imperial Rent of Reserve Currency

The Imperial Rent of Reserve Currency

Arbitrate and Violate - A Critique of the Foundation Laid by the Delhi High Court in the Case of NTT DoCoMo Inc. vs. Tata Sons Limited

The decision of the Delhi High Court in the matter of NTT DoCoMo Inc vs Tata Sons Limited and the settlement thereof in the year 2017 has attracted significant attention from all stakeholders. The case involves an analysis of the foreign direct investment policy and the regime regarding foreign investments in India and exits of foreign investors from companies in India. The dispute involves an interplay of interpretation of contracts and the role of the Reserve Bank of India. While the Foreign Exchange Management Act, 1999 does not permit “assured returns” to a foreign investor at the time of its exit, it appears that the arbitral tribunal, and the DHC took a favoured view when it came to NTT DoCoMo Inc. The decision of the DHC, upholding the foreign arbitral award for a contract that was in obvious violation of FEMA was quite startling. Unfortunately, this rationale was also used by the Supreme Court in the case of Vijay Karia & Others vs Prysiman Cavi E Sistemi SLR & Others, which further compounds this issue. The Apex Court accepted the view of DHC in the NTT Docomo case, and held that a violation of the provisions of the FEMA does not result in a “breach of public policy of India”. This paper aims to analyse and critiq the decisions taken by the arbitral tribunal, DHC and the Supreme Court in the case of NTT DoCoMo Inc vs Tata Sons Limite and Vijay Karia & Others vs Prysiman Cavi E Sistemi SLR & Others. Besides legality, these two cases also raise serious concerns regarding the quality of corporate governance of companies and the professional ethics of legal advisory services, which has been discussed further in this paper. In the author’s view, RBI, as a custodian of the foreign currency reserves and implementer of FEMA, is best placed to interpret the regulations and operational guidelines issued under FEMA. The decision in these two cases, where the parties have used the international arbitration clause to bye-pass the laws of India, has now provided a template for parties to enter into contracts with a deliberate intention to bypass the provisions of the law, and indulge in unethical practices. The paper tries to elucidate how these cases have set an incorrect precedent as regards assured returns in India. Keywords: “assured returns”, “international arbitration”, “Tata - NTT Docomo Dispute”, “pricing guidelines”

An Analysis of Causal Relationship between Remittances and Imports in Nepal

The study aims to evaluate the casual relationship between remittances and imports in Nepal. Remittances are considered to be the most significant source of foreign currency that makes strong position of balance of payments, whereas the volume of imports is one of the most significant elements that lowers the volume of foreign currency reserve of the nation. It is generally believed that remittances have positive effects on volume of imports. On the contrary, if there is more imports than exports, it may run out trade deficit. It does make negative impact on the exchange rate of the home country. A weaker currency can raise the value of remittances sent back to the country, encouraging migrants to send more money home that influenced in growth of remittance. To analyze the relationship between remittance and imports, the study used annual data for 46 years from 1975 to 2020 A.D. The study used Vector Autoregressive model as there is no co-integration between the variables as per Johansen's technique. The variance decomposition test is carried out in a similar manner. The results demonstrate that there is a close connection between remittances and imports. But surprisingly, the result of VAR Granger causality test reveals that imports cause remittance rather than the other way around. Since import influences remittances, policymakers should consider enacting policies that discourage import and encourage export.

Sovereign risk spill-overs in the banking sectors of Central America and the Caribbean

This paper examines the relationship between sovereign credit ratings and bank stability in Central America and the Caribbean (CAC). We use data on 177 banks from 24 countries for the period 1999–2014 and find that sovereign rating downgrades precede deterioration in bank stability. The finding highlights the importance of understanding the transmission channels and the amplification of sovereign risk spill-overs. With respect to the former, we found evidence to support both the “balance sheet exposure” and “asset valuation adjustments” arguments found in the literature. Concerning the latter, the sovereign risk spill-overs are more intense in countries with low foreign currency reserves, limited financial transparency and weak central bank independence. Our findings support the argument that banks are vulnerable to the aggravation of sovereign risk concerns and thus, the zero risk weight to sovereigns should be reviewed.

The International Monetary System: New Evidence Concerning a Transition to Multipolarity

This article focuses on the transition of the international monetary system to a multipolar structure. The international monetary system continuously evolves, reflecting developments in the world economy. The main problem of the current international monetary system is its dependence on one key currency which still remains the US dollar. The authors of this study address the issue of a transition towards a multipolar system by examining currency concentration. The primary objective of this work is to establish whether or not the current international monetary system shows signs of transitioning towards multipolarity. To achieve this, the authors have used tools measuring the level of market concentration. The change of polarity of the international monetary system is analysed with concentration ratios and the Herfindahl-Hirshmann index. The theoretical part focuses on definitions of key terms essential for this study, such as international monetary system, currency polarity, global currency, and currency concentration. For the practical part, data were sourced from the databases of global institutions, namely the International Monetary Fund (IMF), Bank for International Settlements (BIS), Society for Worldwide Interbank Financial Telecommunications (SWIFT) and the European Central Bank (ECB). This part focuses on a period of time between 2001 and 2019, and the results indicate that the current international monetary system shows signs of transitioning towards a multipolar structure. The level of currency concentration of the key reserve currencies dropped slightly, although not enough to cause a qualitative change of the current international monetary system. This study may serve as a base for future research on this topic.

The SDR and influences on the currency swap agreements for RMB

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

Economic boundaries of the Bank of Russia's operations

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

Macroeconomic variables for predicting bear stock markets of Taiwan and China

PurposeThis research examines how macroeconomic variables can precisely predict bull/bear stock markets in China and Taiwan.Design/methodology/approachThis paper adopts a two-state Markov switching model to characterize the bull and bear markets spanning from 1994 to 2019 and then conduct a bear stock market predictability test by running regressions between the filtered probabilities of bear markets and a series of macroeconomic variables in turn at different horizons of 1, 3, 6, 12 and 24 months.FindingsThis paper shows that inflation rates, changes in real exchange rates, and foreign currency reserve growth are key predictors of bear markets in China, while term spreads, unemployment rates and foreign reserve growth are major factors that can predict bear markets in Taiwan. Remarkably, industrial production growth does not have predictive power for bear markets, which may suggest emerging markets are driven by fund flows rather than real economic activities. Besides, the impact directions of foreign currency reserve growth are opposite, which may be due to different proportions of the financial accounts in their balance of payments.Practical implicationsIn practical respect, this paper provides market participants the usefulness, impact direction and implications of bear market predictors when building their market-timing strategies in China and Taiwan stock markets. The government institutions may also thereby make appropriate policies to prevent huge stock market downturns and serious drawbacks.Originality/valueIt highlights the “fund-driven market hypothesis” and “foreign currency reserve effects” that commonly dominate Taiwan and China stock markets since both are highly affected by international funds.

How does the reserve currency (US dollar) affect the diversification capacity of green bond investments?

The growing potential of green bond markets helps mobilize financial resources to green projects that significantly contribute to the Sustainable Development Goals (SDGs). Recent research suggests a time-varying dynamic relationship between green bond, conventional bond, stock, and energy markets. But, there is scarce information concerning the determinants of the relations between these markets. To fill this important gap, the dynamic conditional correlations (DCCs) between green bond, conventional bond, stock, and energy markets are first derived to explore the characteristics of the DCCs. Consistent with recent studies, the results indicate the higher DCCs of green bond returns with conventional bond returns in comparison with the DCCs of green bonds with energy commodity and stock markets. Then, the role of the US dollar on the DCCs is examined by accounting for uncertainty in global markets, monetary conditions, financial stress, and business cycles and utilizing the autoregressive distributed lag (ARDL) approach. The main findings demonstrate the crucial role of the rising US dollar in enhancing the DCCs between green and conventional bond markets. Contrary to this finding, we observe that the rising US dollar reduces the level of the DCCs of the green bonds with energy commodity and stock markets. Our results emphasize that the US dollar appreciations increase the diversification capacity of green bond investments for market players in energy commodity and stock markets. The implications of our analysis are valuable for environmentally-friendly investments and optimal asset allocation strategies in the energy and financial markets.

Impact of Foreign Reserve in Economic Growth: An Empirical Study on Bangladesh

Bangladesh maintained its robust performance in development. There have been upbeat exports and remittances. Overall inflation is slow & the current account deficit was reduced by higher exports and lower import inflation, but the decrease in the financial account surplus diluted the effect of the decline in the current account deficit on the overall balance of payments deficit. In the context of the Error Correction Process, this research studied the impact of economic development on Bangladesh foreign reserve assets using data for the period 1980- 2014. The findings show that economic growth is extremely important. The model's estimate, that economic growth and foreign reserves have a positive long-term relationship. The model checked by error correction estimates for error correction is negative and statistically important. In addition, the model showed that economic growth has short-term relationship too. The adjustment speed is more than 60 percent, suggesting that the term for error correction corrects the imbalance of the previous year. Granger causality test confirm that there is long run & short run causality among the variables. The question is whether the accumulation of foreign currency reserves is a required prerequisite for economic development. The empirical findings in this paper indicate that the rise in foreign exchange reserves induces GDP growth, although causality has not been demonstrated in the opposite direction. Keywords: Bangladesh; Economic Growth; Foreign Reserve, Error correction model; International reserves. DOI: 10.7176/EJBM/13-8-09 Publication date: April 30 th 2021

The dynamics of the relationship between real estate and stock markets in an energy-based economy: The case of Qatar

In this study, we investigate the dynamic linkages between the real estate and stock markets in Qatar. Using monthly data over the period 2006–2020, the nonlinear model of Enders and Siklos (2001) and the linear and nonlinear Autoregressive Distributed Lag (ARDL) models, our investigation seeks to trace the channel of transmission between the two markets outlined by two well-known theories: namely, the effects of wealth and of credit. The results show that the model of Enders and Siklos (2001) does not explain the dynamics of the relationship between the two markets. The linear ARDL provides some evidence to support the wealth effect but the model is mis-specified. The results from the nonlinear ARDL model support to the effect of wealth and provide evidence on the dynamic linkages between the two markets in the short run as well as the long run. In addition, when money supply, bank credit, oil prices, and currency reserves are in a downturn, we find a long-run relationship between their rate of decline and that of real estate prices, but in an upturn, the rate of increase of real estate prices has a long-run relationship with the rate of increase in the inflation rate. Our results show that the nonlinear ARDL model passes a battery of rigorous tests of robustness. The implications of the empirical results are also discussed.

Foreign Safe Asset Demand and the Dollar Exchange Rate

ABSTRACTWe develop a theory that links the U.S. dollar's valuation in FX markets to the convenience yield that foreign investors derive from holding U.S. safe assets. We show that this convenience yield can be inferred from the Treasury basis, the yield gap between U.S. government and currency‐hedged foreign government bonds. Consistent with the theory, a widening of the basis coincides with an immediate appreciation and a subsequent depreciation of the dollar. Our results lend empirical support to models that impute a special role to the United States as the world's provider of safe assets and the dollar as the world's reserve currency.

Persistent current account imbalances: Are they good or bad for regional and global growth?

This paper examines the regional and global growth effects of current account imbalances in Japan, Germany, and the People’s Republic of China (PRC)—the three largest persistent surplus countries—and the United States and United Kingdom, the two largest persistent deficit countries. Controlling for a set of macroeconomic determinants, we use a structural vector autoregression (SVAR) framework to show that positive shocks to current account balances in the PRC, Germany, and Japan transmit positive regional and global growth effects, particularly in the case of spillovers to regional growth from Japan. As expected, the global growth response is lower in magnitude than the regional growth response. In addition, the extent of the effect is amplified by global value chains, pointing to the significant role played by trade in intermediate goods. For current account deficit countries, the magnitudes of the responses of growth to shocks are much lower on average than in the case of current account surplus countries. We find some marginal positive effects on regional and global growth emanating from a positive shock on the UK current account—i.e., a reduction in the deficit. For the US, a positive shock to its persistent current account deficit marginally drags on global growth, possibly reflecting declining import demand and wealth effects linked to the US dollar’s status as the global reserve currency. Our findings have important policy implications, particularly in light of discussions in recent years on whether current account surplus countries are hindering growth abroad.

ПЕРСПЕКТИВЫ РОССИЙСКОЙ БАНКОВСКОЙ СИСТЕМЫ В УСЛОВИЯХ РАЗВИТИЯ ЕВРАЗИЙСКОЙ ИНТЕГРАЦИИ

Purpose: is to study the impact of the EAEU integration on the Russian banking system and identify the benefits for its development due to integration processes. Results: the financial indicators of banking sectors of the EAEU countries are examined and their comparative analysis is performed. This showed the possibilities for the development of the Russian banking system in the domestic market and in the territory of the Union States. The regulatory documents of the EAEU have been studied. The expected positive effect for the Russian banking sector from the implementation of the EAEU common financial market project was noted. Various issues of introducing a single currency as a means of payment for the calculation of the EAEU countries are investigated. The current structure of payments of the Union States in national and world reserve currencies is considered. This allowed us to identify Russia's interests in creating a currency union and identify the constraints of this process. The presence of Russian banks outside the country and their position in the international arena are considered. A list of the main obstacles to their expansion abroad is formulated. The article reveals the relationship between the development of integration processes in the EAEU and the opportunities to increase the competitiveness of the Russian banking system in the global financial market. Conclusions: the Banking system of Russia today has a great potential for development on a national scale, in the market of banking services of the Eurasian Union and at the global level. The integration policy of the EAEU in the banking sector contributes to increasing the competitive advantages of the Russian banking system. The implementation of the agreed strategic plan to create a common financial market for the EAEU will accelerate the process of qualitative development of the Russian banking system.

An Exorbitant Privilege in the First Age of International Financial Integration

The exorbitant privilege literature analyses the positive returns differential on net foreign assets enjoyed by the United States in the last quarter of the twentieth century as the issuer of the global reserve currency. In the first age of international financial integration (1871–1914), the global reserve currency was the British pound sterling. Whether the United Kingdom enjoyed a similar privilege is analysed with a new dataset, encompassing microdata on railroad and government financial securities. The use of microdata avoids the flaws that have plagued the US studies, particularly the use of incompatible aggregate variables. A monthly proxy for the British international investment position is constructed and estimates for capital gains and dividend yields obtained. The estimation points to an average privilege of 8.3% of GDP, with high variation. The finding supports the claim that in part exorbitant privilege is a general characteristic of the issuer of the global reserve currency and not unique to the late twentieth century US. Nonetheless, a decomposition of returns shows that there were fundamental differences between pre-war Britain and the late twentieth century US investment patterns and their response to the advantage presented by exorbitant privilege.

Priorities for the COVID-19 pandemic at the start of 2021: statement of the Lancet COVID-19 Commission

Priorities for the COVID-19 pandemic at the start of 2021: statement of the Lancet COVID-19 Commission

El renminbi (RMB) y su papel frente a la búsqueda de hegemonía económica de China

Ante un orden mundial unipolar, con Estados Unidos como Estado dominante, China busca reconfigurar este orden hacia uno multipolar. Una vez alcanzados resultados importantes en el ámbito económico, pareciera que su próximo objetivo es posicionar el renminbi (RMB). El primer logro fue alcanzado cuando el FMI autorizó su ingreso a una selecta canasta de divisas, lo que lo convierte en moneda de reserva internacional. Sin embargo, el RMB está lejos de ser relevante como el dólar. Este artículo evalúa las causas, las consecuencias y el grado de posicionamiento que el RMB ha alcanzado en el orden internacional.