Currency Sovereign Research Articles

Virtual Currencies and Their Potential Impact on Financial Markets and Monetary Policy

Virtual currencies are a contemporary form of private money. Thanks to their technological properties, their global transaction networks are relatively safe, transparent, and fast. This gives them good prospects for further development. However, they remain unlikely to challenge the dominant position of sovereign currencies and central banks, especially those in major currency areas. As with other innovations, virtual currencies pose a challenge to financial regulators, in particular because of their anonymity and trans-border character.

CRYPTOCURRENCY PHENOMENON IN THE INTERNATIONAL MONETARY SYSTEM

UDC 336.74
 
 Vasylenko Artur, post-graduate student. Mariupol State University. Cryptocurrency Phenomenon in the International Monetary System. The main prerequisites of cryptocurrency emergence in the international monetary system in terms of regionalization of the world economy are defined in the article. Determination of «cryptocurrency» category was analysed from the point of two main approaches to its treatment: on the one hand cryptocurrency is admitted to be the currency equally to the sovereign currency, and on the other hand it is considered as an unrecognized virtual asset.
 The main consequences which arise in case of widespread use of crypto currency for the country and for the parties that agreed to use cryptocurrency were analysed and systematized.
 On the basis of the research, given the current trends in the world economy, the author put forward and substantiated the hypothesis to classify the phenomenon of cryptocurrency as the effects of a famous philosophical «Negation of negation law» formulated by G. Hegel at the beginning of the XIX century.
 
 Keywords: cryptocurrency, material money, electronic money, digital currency, regional currency integration, blockchain, mining, capitalization, «Negation of negation law».

Wage Divergence, Business Cycle Co‐Movement and the Currency Union Effect

AbstractThis paper studies the impact of wage growth divergence on business cycle co‐movement in the context of currency unions. While the theoretical literature on optimum currency areas highlights the equilibrating effect of divergent wage growth after asymmetric exogenous demand shocks via the external demand channel, recent literature on euro area imbalances emphasizes its dis‐equilibrating effect as a source of asymmetric domestic demand shocks, and therefore suggests a negative link to business cycle co‐movement. Our empirical results reveal that the latter effect has been clearly dominating in the euro area: Wage growth differentials across countries – while of minor importance for non‐euro area EU countries with sovereign currencies – significantly reduce business cycle co‐movement within the monetary union and thus increase the cost of the common monetary policy. The large magnitude of the effect calls for enhanced co‐ordination efforts of wage policies in the euro area.

Exchange Rates, Carry Trade Returns and Political Risks

This paper elucidates the channels through which sovereign risk, exchange rates and currency risk premia are related. I show that the channels are different depending on whether a country is classified as emerging or an advanced economy. Generally, for emerging market economies, local sovereign risk factors, namely country-specific political risk and macroeconomic risk do play a significant role in the depreciation of the local currency relative to the U.S. dollar. Whilst there is no convincing evidence that local determinants of sovereign risk cause a depreciation of currencies of advanced economies before the 2007 financial crisis, I do find that political risk does matter for advanced economies in the post-crisis era. For both sets of economies, global factors also play an important role in the relationship between sovereign risk and exchange rates. Secondly, double-sorting 34 currencies into different portfolios based on the level of macro risk and political risk, I provide evidence that local determinants of sovereign risk are priced in the FX markets, i.e. they can forecast currency carry trade excess returns in the cross-section. Local political risk in particular seems to have become an important carry trade risk factor in the post-2007 financial crisis era. This is the first research to explain carry trade excess returns with local sovereign risk factors as against sovereign risk as a whole.

A Sovereign Currency Approach to China’s Policy Options

This article examines the fiscal and monetary policy options available to China as a sovereign currency-issuing nation operating in a dollar standard world. We first summarize a number of issues facing China, including the possibility of slower growth, global imbalances, and a number of domestic imbalances. We then analyze current monetary and fiscal policy formation and examine some policy recommendations that have been advanced to deal with current areas of concern. We next outline the sovereign currency approach and use it to analyze those concerns. We conclude with policy recommendations consistent with the policy space open to China.

Stock market returns and exchange rate movements in a multiple currency economy: the case of Zimbabwe

This study seeks to provide new evidence on the stock market and exchange rate relationship in Zimbabwe, a country that does not have its own sovereign currency. The bivariate vector autoregressive approach is used to establish the relationship between the stock market and exchange rates. The results show that no relationship exists between the stock market and the proxy exchange rate. The findings contradict the expectation that exchange rate movements would influence domestic stock market prices. This finding is especially interesting given the fact that Zimbabwe uses a basket of currencies for transacting purposes, albeit with the United States dollar as a major currency for reporting and stock market pricing purposes. The findings provide new evidence of a disconnect between the stock market and exchange rate movements. This has implications for international portfolio diversification and the use of foreign currency as an asset class in an economy using a multiple currency system.

Is There a Credit Risk Anomaly in FX Markets?

This paper explores whether a link between sovereign credit ratings and currency returns exists. Perhaps contrary to expectations, it finds that currencies of countries with higher credit risk tend to generate lower returns than those with a lower credit risk. The credit risk spread cannot be explained by standard risk factors.

Monetary and Fiscal Operations in the People's Republic of China: An Alternative View of the Options Available

This paper examines the fiscal and monetary policy options available to the People’s Republic of China (PRC) as a sovereign currency-issuing nation operating in a dollar standard world. The paper first summarizes a number of issues facing the PRC, including the possibility of slower growth and a number of domestic imbalances. Then, it analyzes current monetary and fiscal policy formation and examines some policy recommendations that have been advanced to deal with current areas of concern. The paper outlines the sovereign currency approach and uses it to analyze those concerns. Against this background, it is recommended that the central government’s fiscal stance should be gradually relaxed so that local government and corporate budgets can be tightened. By loosening the central government’s budget but tightening local government and corporate budgets at a measured pace, the PRC can avoid depressing growth or sparking excessive inflation.

Currency Sovereignty and the Possibility of Full Employment

Paper presented in Argentina at the 6to. Congres o Nacional de Estudios del Trabajo, La Asociacion de Especialistas en Estudios del Trabajo, 14 August 2003. Orthodox theory makes a fine distinction between fiscal and monetary policy. Monetary policy has to do with controlling the private creation of money through control over the quantity of bank reserves emitted. Fiscal policy has to do with government spending and taxing, and, if tax revenues prove insufficient, with financing government spending through borrowing. Both theory and policy reject with horror the possibility that fiscal and monetary operations might be combined—for example, through government finance of its spending by printing money. For this reason, central bank independence is maintained, to a greater or lesser degree, to prevent the hyperinflation that would surely result from confusion of fiscal and monetary policy operations. I argue that this orthodox view is useless for analyzing the operations of a nation operating with a currency—a nonconvertible, floating currency that is accepted by the government issuer in payment of taxes and other liabilities due the government and where the government issuer is able to impose tax liabilities that are denominated in the same currency. When Argentina operated with a currency board, it did not have a sovereign currency. Today it does. Orthodox theory may well have been useful for analyzing Argentina before it abandoned the currency board, but it is no longer useful. Unfortunately, economists and politicians are so accustomed to thinking of the operation of non-sovereign currencies (say, the gold standard) that they have great difficulty in understanding the economic possibilities of nations that operate with sovereign currencies. Any country with a sovereign currency can afford an ELR program with which it will achieve full employment. It is in this sense that I argue that a sovereign currency is a pre-requisite to ELR. This paper describes operation of fiscal policy in a nation with a sovereign currency, analyzes the monetary policy in such a nation, and concludes with some balance sheets to demonstrate the main points.

Options for China in a Dollar Standard World: A Sovereign Currency Approach

This paper examines the fiscal and monetary policy options available to China as a sovereign currency-issuing nation operating in a dollar standard world. We first summarize a number of issues facing China, including the possibility of slower growth, global imbalances, and a number of domestic imbalances. We then analyze current monetary and fiscal policy formation and examine some policy recommendations that have been advanced to deal with current areas of concern. We next outline the sovereign currency approach and use it to analyze those concerns. We conclude with policy recommendations consistent with the policy space open to China.

Outside Money: The Advantages of Owning the Magic Porridge Pot

Over the past two decades there has been a revival of Georg Friedrich Knapp’s “state money” approach, also known as chartalism. The modern version has come to be called Modern Money Theory. Much of the recent research has delved into three main areas: mining previous work, applying the theory to analysis of current sovereign monetary operations, and exploring the policy space open to sovereign currency issuers. This paper focuses on “outside” money — the currency issued by the sovereign — and the advantages that accrue to nations that make full use of the policy space provided by outside money.

Currency Without a Sovereign: On the Causes of the Euro Crisis and Its Overcoming

I argue that each currency needs a sovereign for stabilizing financial markets and the real economy. Failing this, a currency union would sooner or later decay. Therefore, I explain the ongoing crisis of the Euro area by the lack of a sovereign. The theory of optimum currency does not equip us with sufficient knowledge for overcoming the crisis for it separates money and the state, and gives reason for such reforms like the Fiscal Compact, where fiscal operations ought to depend on assessments made by financial markets. I demonstrate that the implementation of this pact will lead to a deeper crisis of the Euro area and to a deeper split into creditor and debtor countries. I also argue in favor of transforming the currency union into a sovereign currency area, in which monetary and fiscal policies are effectively coordinated between the central bank and a central financial authority in the sense of the concept of functional finance.

Sovereign Risk and Currency Returns

We empirically investigate the relation between currency excess returns and sovereign risk, as measured by credit default swap (CDS) spreads. An increase in a country’s CDS spread is accompanied by a contemporaneous depreciation of its exchange rate as well as an increase of its currency volatility and crash risk. The link between currency excess returns and sovereign risk is mainly driven by exposure to global sovereign risk shocks and also emerges in a predictive setting for currency risk premia. Sovereign risk forecasts excess returns to trading exchange rates, volatility and skewness, and is strongly priced in the cross-section of currencies. Moreover, we find that sovereign risk accounts for a large share of carry trade returns, and that carry and momentum strategies generate high (low) returns across countries with high (low) sovereign risk.

European Media Coverage of Argentina’s Debt Default and Recovery: distorting the lessons for Europe

In 2001 Argentina defaulted on its debts and then devalued its currency by abandoning the peso–dollar peg. The economy rebounded and has grown relatively strongly since then. This paper uses a critical political economy approach to first show that the Argentinian strategy finds support in the literature examining the effects of sovereign debt default, currency devaluation and fiscal consolidation on economic growth. Argentina is thus relevant to Europe’s ongoing crisis. The article then investigates European media coverage of the Argentinian experience through an examination of major newspapers’ stories between 2008 and 2013. It argues that the media have distorted the lessons of the Argentinian recovery by focusing on the negative consequences of default rather than its benefits; by emphasising the role of rising commodity export prices over domestic policy decisions in stimulating the economy; by opposing some aspects of government intervention in the economy even if the latter played a beneficial role; and by exaggerating the negative consequences of inflation. This distorted coverage is explained through reference to the media’s ideological role in the implementation of austerity policies in Europe.

The Euro Crisis and the Job Guarantee: A Proposal for Ireland

Euroland is in a crisis that is slowly but surely spreading from one periphery country to another; it will eventually reach the center. The blame is mostly heaped upon supposedly profligate consumption by Mediterraneans. But that surely cannot apply to Ireland and Iceland. In both cases, these nations adopted the neoliberal attitude toward banks that was pushed by policymakers in Europe and America, with disastrous results. The banks blew up in a speculative fever and then expected their governments to absorb all the losses. The situation was similar in the United States, but in our case the debts were in dollars and our sovereign currency issuer simply spent, lent, and guaranteed 29 trillion dollars’ worth of bad bank decisions. Even in our case it was a huge mistake — but it was “affordable.” Ireland and Iceland were not so lucky, as their bank debts were in “foreign” currencies. By this I mean that even though Irish bank debt was in euros, the Government of Ireland had given up its own currency in favor of what is essentially a foreign currency — the euro, which is issued by the European Central Bank (ECB). Every euro issued in Ireland is ultimately convertible, one to one, to an ECB euro. There is neither the possibility of depreciating the Irish euro nor the possibility of creating ECB euros as necessary to meet demands for clearing. Ireland is in a situation similar to that of Argentina a decade ago, when it adopted a currency board based on the US dollar. And yet the authorities demand more austerity, to further reduce growth rates. As both Ireland and Greece have found out, austerity does not mean reduced budget deficits, because tax revenues fall faster than spending can be cut. Indeed, as I write this, Athens has exploded in riots. Is there an alternative path? In this piece I argue that there is. First, I quickly summarize the financial foibles of Iceland and Ireland. I will then — also quickly — summarize the case for debt relief or default. Then I will present a program of direct job creation that could put Ireland on the path to recovery. Understanding the financial problems and solutions puts the jobs program proposal in the proper perspective: a full implementation of a job guarantee cannot occur within the current financial arrangements. Still, something can be done.

中国崛起的历史定位与发展方式转变的切入点 The Historical Context of the Rise of China and the Entry Point of the Transformation of the Development Pattern

2007年在美国发生的次贷危机已转化为主权货币的全球博弈，而人民币升值是其中焦点。考察中国自秦以来和西方五百年来的发展历史，我们提出自我肯定需求的新概念和一个在分配环节的全新的供需理论。只要有可能，人对自己的评价一般高于他认知范围内的平均水平，在分配环节他更希望得到高于自己评估的份额。这种需求我们称之为自我肯定需求。大多数情况下，总的自我肯定需求必定大于其所在社会的当下产出，这就形成了一个缺口，这个缺口对任何统治者(或管理者)而言都是一个巨大的挑战：要维持一个社会的和谐稳定，这个缺口必须由额外的供给来填补。纵观历史，我们指出四种主要的额外供给方式：学习和自主创新、外部获取、透支未来以及崩溃后的再出发。国民的自我肯定需求是否得到适度的满足，正是国家兴衰的关键。中国的崛起是中国两千多年以来历史进程与全球五百年以来现代化进程的交汇点。学习和自主创新、外贸顺差以及再出发这三种财富的涌现方式同时在中国上演。大量涌现的资源是中国发展的动力，但是不合理的运用会驱使中国经济泡沫化，泡沫化的后果就是金融危机和公有资产快速流失，国家的发展潜力受到实质性损害。因此，我们提出创建一种以人为本的货币制度，为每一个公民建立社会保障个人账户并注资，将涌现的资源平均地分配给每一个公民，以此作为中国发展方式转变的最佳切入点。 The subprime mortgage crisis of the United States in 2007 has evolved into global game of sovereign currencies, and the appreciation of Chinese currency RMB has been one of the focuses. By analyzing the history of China since Qin Dynasty and the development history of western countries in the last five cen-turies, a new concept of self-assertiveness demand is introduced and a new theory of supply and demand in the process of income distributions is proposed. Self-assertiveness demands describe the demands originated from human cognitive tendency to confirm self value. Normally, people tend to give themselves higher than average evaluation within their scopes, and expect to receive more than they would be supplied, if possible. Therefore, the total self-assertiveness demands of a society tend to exceed the total current supplies. This gap is a challenge to any ruler or manager. To maintain a harmonious and stable society, the excessive demand has to be met with extra supplies. We propose four types of extra resource supplies in accordance with the challenge: learning and innovations, external acquisitions, overdraws from the future, and dynastic changes. It is the key to the rise and fall of nations that their citizens’ self-assertiveness demands are properly satisfied. China is now facing a chance of once-in-a-millennium, an intersection between Chinese two-millennium his- tory and the five-century global modernization. Three resource emergences, learning, trade surplus and re- starting from ruins, are taking place in China simultaneously. The abundant emerging resources are the driving force behind economic development, but failure to properly utilize the resources will lead to formation of economic bubbles, and the consequent bust of the bubbles will result in heavy losses of public wealth which in turn exerts permanent harms to sustainable development. It is, therefore, proposed to establish a people-oriented monetary system by creating and registering a society security personal account for every citizen and distributing the emerging resources to each account equally, and to make it the best entry point of the transformation of the development pattern of China.

Domestic Inequality Is Root of US‐China Conflict

The solidarity of the G‐20 nations in staving off global financial crisis two years ago has deteriorated into a brawl over currency valuations, trade imbalances and sovereign debt, reflecting the great powershift from the West to the East and the emerging economies.In this section, we invited comments from historians, a former head of state who successfully navigated the Asian financial crisis and a prominent Chinese dissident.

The Long‐term Solution for Europe

The solidarity of the G‐20 nations in staving off global financial crisis two years ago has deteriorated into a brawl over currency valuations, trade imbalances and sovereign debt, reflecting the great powershift from the West to the East and the emerging economies.In this section, we invited comments from historians, a former head of state who successfully navigated the Asian financial crisis and a prominent Chinese dissident.

The Next 40 Years Will Be the Most Important in History

The solidarity of the G‐20 nations in staving off global financial crisis two years ago has deteriorated into a brawl over currency valuations, trade imbalances and sovereign debt, reflecting the great powershift from the West to the East and the emerging economies.In this section, we invited comments from historians, a former head of state who successfully navigated the Asian financial crisis and a prominent Chinese dissident.

What If the Government Just Prints Money?

This post considers whether a given deficit resulting in more reserves in circulation and fewer bonds held by the non-government sector raises the likelihood of spiraling inflation, as most interpretations of the government budget constraint (GBC) assume. The approach here recognizes the importance of understanding the balance sheet implications of both of these options that are central to MMT. While most economists typically assume a supply and demand relationship, as in the hypothesized loanable funds market, and then build models accordingly, such an approach can miss important relationships in the real world. In particular, any transaction in a capitalist economy results in changes in the agents’ financial statements; if the hypothesized supply and demand relations are not consistent with the actual changes occurring within the financial statements of the relevant agents, then the hypothesized model is irrelevant. In a modern money regime such as ours in which there is a sovereign currency issuer operating under flexible exchange rates, “monetization” versus “financing” as characterized both in the GBC and in the hypothesized loanable funds market fall into this category.