Excess Reserves Research Articles

Does interest rate on excess reserves affect inbound tourist flow?

ABSTRACT The effect of macroeconomic indicators on tourism demand is well-established. However, the plausible impact of interest rate on excess reserves (IOER), an unconventional monetary policy, on inbound tourist flow is unclear. Using monthly data from 2011:M1 to 2019:M9, I assess the responsiveness of inbound tourist flow from the United Kingdom, Germany, Brazil, France, India, and Italy, six major originators of foreign tourists to the United States, to changes in the IOER of the United States. The results of an autoregressive distributed lag model and generalized methods of moment show that monetary expansion in response to a drop in the IOER by the Federal Reserve through the exchange rate channel boosts inbound tourist flow to the United States.

A dynamic yard space reservation algorithm based on reward-penalty mechanism

Increasing throughput at container terminals leads to higher yard occupancy rates, reduced yard service capacity, and inefficient use of space. These issues result in longer waiting times for trucks, underutilized yard slots, and longer distances between berth positions and the yard, particularly under high occupancy conditions. Traditional methods for allocating yard space fail to adequately consider dynamic container arrival patterns, conflict between container operations, and efficient use of yard resources. This paper introduces an innovative approach to improve yard efficiency by dividing yard container retrieval into time intervals and dynamically reserving yard slots within each interval. This method aims to minimize operational conflicts, reduce distances between blocks and berths, and avoid excessive reservations. We propose a dynamic reservation algorithm based on a reward-penalty mechanism to handle the problem's complexity and real-time demands. Furthermore, a time-series reward-penalty mechanism, which considers past reservation feedback and future reservation potential, ensures the concentration and continuity of container groups in the yard. Our evaluation metrics and multiple experimental scenarios demonstrate that this method significantly enhances yard efficiency and overall port productivity compared to static and other dynamic algorithms.

CBDC and the Banking System

Abstract This paper examines the potential impact a central bank digital currency (CBDC) on banks’ balance sheets. We first analyze the possible implications of the introduction of a CBDC for the banking system and the economy as a whole. Our analysis indicates that the impact of a CBDC depends on a number of design choices and on how credit institutions re-optimize their balance sheets in response to the outflow of deposits caused by the substitution of private money with public digital money. We then present a series of illustrative simulations on the impact of a CBDC on the funding structure and profitability of credit institutions using data on Italian banks between June 2021 and March 2023. The analysis suggests that the overall impact on banks’ funding could be manageable in the presence of individual holding limits and in an environment characterized by ample liquidity and stable funding for credit institutions. The cost of covering the reduction of deposits would be relatively higher for intermediaries with low excess reserves and for those that may need to issue long-term liabilities to maintain stable funding levels above regulatory requirements.

How to conduct monetary policies. The ECB in the past, present and future

We study the evolving operating procedures used by the ECB since its creation. During the period up to 2015, bank reserves were scarce and the ECB, like other central banks, used a corridor system in which the money market rate could fluctuate within the bounds set by the lending and the deposit rates. With the start of Quantitative Easing (QE) the operating procedure evolved into a regime of reserve abundance. This regime has become problematic since the inflation surge forced the central banks to raise the policy rate. The result has been a massive transfer of central banks’ profits (and more) to the banks. We propose a two-tier system of reserve requirements that would only remunerate the reserves in excess of the minimum required. This would drastically reduce the giveaways to banks, allow the central banks to maintain their current operating procedures and make monetary policies more effective in fighting inflation.This paper was presented at the ECB@25 Symposium at Erasmus University, Rotterdam on 16th January 2024. We are grateful to Mary Pieterse-Bloem, Sylvester Eijffinger, Casper de Vries, Charles Goodhart and other participants in the Symposium for comments and suggestions. We also profited from comments and suggestions of an anonymous referee.Previous versions of this paper (De Grauwe and Ji, 2023a, 2023b) profited from comments by Ignazio Angeloni, Peter Bofinger, Robert Holzmann, Pablo Rovira Kaltwasser, Karel Lannoo, Vivien Lévy-Garboua, Anna Lozmann, David Marsh, Wim Moesen, Joachim Nagel, Theo Peeters, Stefan Schmitz, Miklos Vari, and by participants in seminars and presentations at the London School of Economics, King’s College (London), the Bundesbank, the Central Bank of Luxembourg, OMFIF, Sciences Po (Paris), the Austrian National Bank, SUERF, the Polish National Bank and the National Bank of Ukraine.

Monetary policy and reserve requirements with a zero-interest digital euro

This study presents an analytical framework to investigate the use of reserve requirements as an indirect instrument to manage CBDC flows in an environment with significantly positive rates. This would complement two other possible instruments: hard limits, whose sole use may raise some concerns, and CBDC remuneration, which in a positive rate environment is not considered a viable option. As in the case of emerging market economies with a flexible exchange rate, in a CBDC framework reserve requirements could be used as a countercyclical tool for macroeconomic stabilization to influence bank lending/funding conditions consistently with the monetary policy stance. In an ample-reserves regime, the effectiveness of this tool would be favored by retaining the interest rate on required reserves and the interest rate on excess reserves (the real key policy rate) as two distinct policy instruments, with the former remaining stable below the latter.

Liquidity Dynamics in Bangladesh: Investigating the Impact of Selected Macroeconomic Indicators Using an ARDL-ECM Method

The study scrutinizes the influence of the selective macroeconomic forces on the liquidity of Bangladesh. The ratio of excess reserve and total deposit liability is used to represent the liquidity of Bangladesh while total domestic credit, lending rate, consumer price index (CPI), excess reserve and exchange rate are selected as the macroeconomic forces. Using yearly data from 1986 to 2021, different time-series techniques have been used. Cointegration test explicates no cointegrating relationship among the variables. It has been found that 58% of the variation of liquidity is explained by the variation of liquidity itself 20% by domestic credit, 19% by consumer price index and another 12% by the other variables like excess reserve, exchange rate and lending rate. From the result of VAR lag order selection criteria, the maximum lag of the series is one. VAR model suggests the stability and no autocorrelation among the variables. From granger causality test, it can be inferred that domestic credit can forecast consumer price index, consumer price index can cause excess reserve of the country, consumer price index can forecast lending rate, domestic credit can cause increase or decrease the liquidity of the country, liquidity can granger cause excess reserve and excess reserve can cause any changes in liquidity. Lastly, excess reserve can predict lending rate. This results will help the policy makers to predict the liquidity trends and the impact of some selected macroeconomic variables contributing to predict the liquidity.

Excess cash and equity option liquidity

AbstractWe examine the relation between excess corporate cash holdings and equity option market liquidity from January 3, 2005 to December 31, 2019. We show that the level of cash reserve in excess of what can be captured by firm characteristics significantly explains stock option liquidity. Trading volume and option open interest increase in companies with a higher magnitude of excess cash, whereas the bid–ask spreads of stock options decline in excess cash. Our findings confirm the theoretical prediction that excess cash improves option market liquidity as it reduces adverse selection problems caused by uncertainty in firm valuations. This relation remains more pronounced with put options, out‐of‐the‐money contracts, and short‐maturity contracts. In addition, excess cash has a stronger impact on option liquidity within firms that have a greater degree of informed trading and during high‐volatility periods in financial markets. Our results show that when uncertainty about firm prospects rises, excess cash becomes more valuable and affects option market liquidity.

Implementing monetary policy with excess reserves: fiscal implications for the euro area

Implementing monetary policy with excess reserves: fiscal implications for the euro area

Excess Reserves and Monetary Policy Tightening

Excess Reserves and Monetary Policy Tightening

A Study of the Challenges of Digital Currencies to the Traditional Financial System and Their Implications for Economic Policy

Abstract Digital currencies, as an emerging monetary form, have profoundly transformed the landscape of financial transactions and redefined the structure of economic ecosystems, exerting an unprecedented influence on traditional financial systems. This study scrutinizes the ramifications of digital currencies on conventional financial systems, utilizing a theoretical framework as the foundation. It specifically employs Vector Autoregression (VAR) and Dynamic Stochastic General Equilibrium (DSGE) models to construct an impact model that examines the influence of digital currencies on monetary policies. The analysis utilizes empirical data to assess the efficacy of digital currencies in shaping economic policy, focusing particularly on their effect on monetary intermediation targets. The findings reveal that digital currencies significantly affect monetary policy, primarily through mechanisms of interest rate and exchange rate transmission. Moreover, the advent of digital currencies is associated with reductions in the money supply, exchange rates, and credit volumes of commercial banks. The analysis establishes a long-term stable equilibrium among the money supply, digital currency volume, cash leakage rate, fixed-to-floating rate ratio, and excess reserve ratio. Notably, the scale of digital currency exerts the most substantial impact on the money supply, contributing 10.89% to its variance. This study underscores the intricate relationships between digital currencies and economic policies, highlighting their critical role in contemporary financial systems.

ОГЛЯД ПРИНЦИПІВ СЕЛЕКТИВНОСТІ ЗАХИСТІВ В РОЗПОДІЛЬЧИХ МЕРЕЖАХ СПОЖИВАЧІВ НАПРУГОЮ 0,4 кВ

The analysis of existing principles of selectivity indicates the complexity and incompleteness of ensuring the coordination of the operation of protection devices in distribution networks of 0.4 kV consumers. Current selectivity is ensured only in the area of action of short-circuit currents. To ensure it, electromagnetic or electronic decouplers with a constant deceleration setting are required. This type of disconnectors is used to perform time selectivity and limit the thermal impact of short-circuit currents on the electrical installation and device. The use of devices with "pseudo-time" selectivity ensures the selectivity of the operation of automatic switches in the area of short-circuit currents. Selectivity "SELLIM" is provided with a speed of 0.01 s, but it is possible only in automatic circuit breakers "Schneider Electric". Logical selectivity requires a communication channel between switching devices and the presence of circuit breakers with appropriate communication ports. It is easiest to ensure selectivity by using switches from the same manufacturer using selectivity tables. But such a solution is not always found in practice. The method of energy selectivity allows, taking into account the ratio between ratings, to implement either partial selectivity or full selectivity up to the limit of the breaking capacity of automatic switches. To ensure energy selectivity between two or more current-limiting devices, it must be taken into account that depending on the location of the short circuit, a different number of circuit breakers will be involved in limiting the emergency current, and therefore, the value of the limited current will also be different. By using circuit breakers with a high level of current limitation and a tripping speed that is inversely related to the short-circuit current, full selectivity can be provided at several levels of the network. This makes it possible to simplify the analysis of selectivity, minimize electrodynamic and thermal effects and reduce the level of voltage drop due to the action of a short circuit. Improvement of electrical installation protection systems makes it possible to design power supply systems without excessive reserves of electrical equipment overload, which reduces their cost, dimensions and weight. On the other hand, in the event of malfunctions in the operation of electrical equipment, this limits emergency currents and prevents failure of the undamaged part of the electrical installation, which significantly reduces downtime. Key words: selectivity, relay protection devices, circuit breakers, electrical devices, 0.4 kV network.

Shedding light on the dynamics of the secured overnight financing rate (SOFR)

AbstractInvestigating the transition from the London interbank offered rate (LIBOR) to the secured overnight financing rate (SOFR) and considering the documented volatility of SOFR, this study examines the dynamic nature and potential drivers of the SOFR by analyzing both the SOFR–EFFR (effective Federal Funds rate) and SOFR–IOER (interest on excess reserves) spreads. The results reveal noteworthy correlations between the SOFR and end‐of‐month anomalies and Federal Reserve market interventions in the repo market. These effects persist even after controlling for other variables, such as the amount of outstanding Treasury securities, Treasury General Account balance, and net repo transactions by primary dealers. Investors in SOFR‐linked instruments should be mindful of the possible impact of these factors.

An update on Excess Savings in Selected Advanced Economies

In a previous FEDS Note, de Soyres, Moore, and Ortiz (2023), we conducted a comparison of household excess savings across advanced and emerging economies over different historical episodes. In that analysis, we found that the stock of excess savings accumulated during the pandemic in the U.S. was exhausted by 2023Q1, while other advanced economies were not expected to deplete their excess reserve until late in 2023.

High Powered Money in India-An Empirical Analysis

High powered money in the sum of commercial bank reserves and currency (notes and coins) held by Public. High powered money in the base for the expansion of bank deposit and creation of money supply. Thus high powered money H=C+RR+ER. Where C represents currency with the public, RR the required reserves in the commercial banks and ER the excess reserves with banks. High powered money also known as the monetary base. In India the Reserve Bank of India is responsible for regulatory and controlling the monetary base. It is important to note that the composition and dynamics of high powered money in India can change over time due to shifts in monetary policy, economic conditions, and changes in banking regulations. High powered money plays a fundamental role in monetary system. It serves as the base upon which the broader money supply (M1, M2 etc) is created through the process of fractional reserve banking. When banks make loans, they create deposits, effectively increasing the broader money supply. The RBI uses various tools, such as open market operations and reserve requirement, to control the growth of high powered money and, consequently the money supply to achieves its monetary policy objectives, such as controlling inflation and promoting economic growth.

Reserve Fund Optimization Model for Digital Banking Transaction Risk with Extreme Value-at-Risk Constraints

The digitalization of bank data and financial operations creates a large risk of loss. Losses due to the risk of errors in the bank’s digital system need to be mitigated through the readiness of reserve funds. The determination of reserve funds needs to be optimized so that there is no large excess of reserve funds. Then the rest of the reserve fund allocation can be used as an investment fund by the bank to obtain additional returns or profits. This study aims to optimize the reserve fund allocation for digital banking transactions. In this case, the decision variable is value reserved based on potential loss of each digital banking, and the objective function is defined as minimizing reserve fund allocation. Furthermore, some conditions that become limitation are rules of Basel II, Basel III, and Article 71 paragraph 1 of the Limited Liability Company Law. Since the objective function can be expressed as a linear function, in this paper, linear programming optimization approach is thus employed considering Extreme Value-at-Risk (EVaR) constraints. In the use of EVaR approach in the digital banking problem, it is found that the loss meets the criteria of extreme data based on the Generalized Pareto Distribution (GPD). The strength of reserve funds using linear programming optimization with EVaR constraints is the consideration of potential losses from digital banking risks that are minimized so that the allocation of company funds becomes optimum. While the determination of reserve funds with a standard approach only considers historical profit data, this can result in excessive reserve funds because they are not considered potential risks in the future period. For the numerical experiment, the following risk data are used in the modeling, i.e., the result of a sample simulation of digital banking losses due to the risk of system downtime, system timeout, external failure, and operational user failure. Therefore, the optimization model with EVaR constraints produces an optimal reserve fund value, so that the allocation of bank reserve funds becomes efficient. This provides a view for banking companies to avoid the worst risk, namely collapse due to unbalanced mandatory reserve funds.

Unconventional monetary policy and the bond market in Japan: A new Keynesian perspective

Using the lens of a medium scale DSGE model, we analyze macroeconomic effects of Japan’s unconventional monetary policy which is known as Qualitative and Quantitative Easing (QQE). Our focus is on the bond market. The model features: (i) commercial bank’s demand for excess reserve in response to liquidity risk and (ii) linkage among central bank, commercial banks and the government via government bonds and bank reserve. We simulate the policy effects of a quantitative easing (QE) shock and a negative shock to the interest rate on excess reserve (IOER). The QE multiplier for real GDP is 1.94 and it has substantial effect on lowering the bond yield in line with the policy target of QQE. On the other hand, an IOER cut has qualitatively similar effects on the real and financial sectors but quantitatively its effect is of second order importance. In light of these policy simulations, we evaluate Japan’s recent yield curve control policy.

Determinants of working capital management for emerging markets firms: evidence from the MENA region

PurposeThis study examines the impact of firm-specific and macroeconomic factors on the working capital behavior of firms listed in the Middle East and North African (MENA) region.Design/methodology/approachThis study is based on a panel data analysis of 687 firms listed on 11 MENA markets, carried out using the Generalized Method of Moments (GMM) approach.FindingsThe results of this study reveal that profitable firms with high levels of operating cash flows adopt a conservative working capital management. Young firms with rapid growth rates, highly leveraged firms and firms with large investments in fixed assets have higher liquidity needs, which explains their tendency to pursue aggressive working capital strategies. Similarly, large firms exercise their bargaining power over their clients and suppliers to implement an aggressive approach of working capital management. Finally, firms do not have the luxury to decide how working capital should be managed when they are subject to outside macroeconomic forces that affect their stakeholders as well.Practical implicationsThe findings of this study can help managers adopt efficient practices and identify optimal working capital levels. Firms in the MENA region maintain excess reserves of cash, which causes under-investment and inefficient allocation of resources in the economy. Improving working capital management practices can allow firms to regain operational efficiency, enhance financial performance and support economic growth.Originality/valueTo the best of the authors' knowledge, this study investigates this topic in MENA emerging markets and contributes to enriching the existing corporate finance literature in emerging markets.

Allocating operating room capacity to non-elective neurosurgical patients improves access and safety for elective patients at Aarhus University Hospital

Introduction This study addresses surgical scheduling within the Department of Neurosurgery at Aarhus University Hospital (AUH). The department provides neurosurgical care to a population of 1.3 million in central Denmark, and has treatment obligations for specific neurosurgical diseases for the entire country, which has a population of 5.8 million. Efficient utilisation of the department’s four operating suites is crucial to ensure that patients have timely access to both non-elective and elective neurosurgical procedures. Historically, the elective operating room (OR) schedule was made without consideration of the possible arrival of non-elective patients; consequently, elective surgeries were often cancelled to accommodate those with more urgent indications. The challenge was thus to introduce a structured way of planning for these non-elective surgical procedures that would minimise the need for cancelling elective surgeries without decreasing overall productivity. Methods Using a mathematical model developed in a previous study at Leiden University Medical Center, the effect of allocating OR time during regular working hours for non-elective neurosurgical procedures at AUH was analysed, so that a weighted trade-off could be made between cancellations of elective patients due to an overflow of non-elective patients and unused OR time due to excessive reservation of time for non-elective patients. This allocation was tested in a six-week pilot study during weeks 24 & 25 and weeks 34–37 of 2020 before being implemented in 2021. Results In the 35 weeks following the implementation, the new allocation strategy resulted in a significant 77% decrease in the cancellation of elective neurosurgical procedures when compared with the same time period in 2019, with a significant 16% increase in surgical productivity. Conclusions This study shows that with mathematical modelling complex problems in the distribution of neurosurgical OR capacity can be solved, improving both patient safety and the working environment of neurosurgeons and OR staff.

Overcoming the Fluctuating Curve from PV Power Generation by Modelling the Integration of Hydrogen Energy Storage Into Electricity Microgrid

Java Madura Bali (Jamali) system is the Indonesian largest grid, which contributes approximately 61%, with the Coal Thermal dominates by 59% and followed by the New Renewable Energy (NRE) of 9%. Solar Photovoltaic Power Plants (SPP) contribute only 1% from the NRE itself. Low voltage customers (TR) are approximately 61% with the residential contribute approximately 42%. The rates of the national SAIDI is 12.72 hours/subscriber/year and the national SAIFI is 9.25 times per subscriber/year. There is some challenge in regulating voltage in area with high penetration of solar PV, case of voltage fluctuation in response to the fluctuating of solar irradiance, as well as other factors such as load transient. This voltage fluctuation is proportional to the amount of current generated by the PV system and also proportional to the solar irradiance.Hydrogen energy storage (HES) is an alternative to NRE-based energy storage technology. Integrating solar PV with hydrogen energy storage and optimisation device may mitigate PV-driven voltage fluctuation, preventing excessive reserve power flow on the grid. The hydrogen energy storage system can cover variation of the loads at the nearby solar PV system in the microgrid and the ability to manage those loads, as mentioned in the energy management system. Integrating the HES within Solar PV system can improve the curve shape, improve system reliability and voltage stability, especially in the Residential Microgrid. Also may build the opportunities to earn new revenues from wholesale electricity markets, enhancing the reliability rate and competitive monetary value.

Closing wells: Fossil development and abandonment in the energy transition

Despite ambitious climate goals and already substantial stocks of developed fossil energy reserves, development of new fossil energy reserves continues to be high. This raises concerns, as it reinforces the fossil industry’s opportunities and incentives to continue extraction, and may necessitate abandonment of developed fossil reserves to meet climate targets. In this paper, we analyze the energy transition, considering fossil development activities. We provide conditions for when the fossil industry will abandon reserves, and establish that continued development of fossil resources is not incompatible with abandoning developed reserves. The first-best implementation of a carbon budget involves reserve abandonment, and thus development that pushes developed reserves in excess of the remaining budget. A quantitative assessment reveals that a volume equal to 9–19% of current oil and gas reserves are optimally abandoned, and that, even under a 1.5∘C warming target, development of new reserves is justified for another decade.