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This paper shows that extending the convertibility guarantee of the traditional currency board to a second reserve currency brings about an automatic, market-driven change of the peg when the initial reserve currency appreciates beyond a specified level. The “dual” currency board thus maintains the advantages of a hard peg, but avoids the economic difficulties associated with the link to an overvalued reserve currency. As an added benefit, the system has the potential to promote global currency stability, with the reserves of the dual currency board country acting as a buffer stock to the exchange cross-rate of the chosen reserve currencies.
Foreign Exchange --- Money and Monetary Policy --- Central Banks and Their Policies --- International Monetary Arrangements and Institutions --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Monetary economics --- Currency --- Foreign exchange --- Currency boards --- Reserve currencies --- Currencies --- Exchange rates --- Conventional peg --- Money --- United States
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This paper tests whether reserve portfolios respond to exchange rate changes with a portfolio rebalancing strategy, which requires the purchase of depreciating currencies and sale of appreciating ones. The paper finds empirical support for the strategy, in particular that dollar depreciation/appreciation results in rebalancing switches vis-a-vis the other major reserve currency, the euro; valuation changes in the minor currencies tend to result in switches among themselves. The finding implies that currency diversifications in response to exchange rate changes have thus far tended to be stabilizing for exchange markets; it also helps explain the relative stability of reserve currency shares.
Finance: General --- Foreign Exchange --- Money and Monetary Policy --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- International Financial Markets --- Monetary economics --- Currency --- Foreign exchange --- Finance --- Currencies --- Exchange rates --- Exchange rate adjustments --- Currency markets --- Reserve currencies --- Money --- Foreign exchange market --- United States --- Foreign exchange rates --- Portfolio management --- Econometric models.
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This paper considers options to address concerns related to functioning of the International Monetary System. Despite its relative stability, the current “non-system” has the inherent weaknesses of a setup with a dominant country-issued reserve currency, wherein the reserve issuer runs fiscal and external deficits to meet growing world demand for reserve assets and where there is no ready mechanism forcing surplus or reserve-issuing countries to adjust. The problem has amplified in recent years in line with a sharp rise in the demand for reserves, reflecting in part emerging markets’ tendency to self-insure against costly capital account crises. On the demand side, the paper explores alternative insurance arrangements that could mitigate the precautionary demand for reserves. On the supply side, it assesses a menu of alternative reserve assets that could offer sustained stability and efficiency. Many of the proposals presented would require fundamental changes in the forms and degree of international cooperation, however, may gain realism and practical relevance if more incremental efforts at strengthening the current system fail.
Banks and Banking --- Foreign Exchange --- Money and Monetary Policy --- International Monetary Arrangements and Institutions --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Monetary Policy --- Monetary economics --- Banking --- Currency --- Foreign exchange --- Currencies --- Reserve currencies --- Reserve assets --- International monetary system --- Exchange rates --- Money --- Central banks --- Foreign exchange reserves --- International finance --- United States
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Foreign exchange intervention (FXI) is a highly debated topic. Yet, comprehensive and comparable data on FXI is hard to find. This paper provides a new dataset of FXI covering a large number of countries over the period 2000-20 at monthly and quarterly frequencies. It includes publicly available data for about 40 countries and carefully constructed proxies for 122 countries. Proxies are focused on both spot and derivative transactions that alter the central bank’s foreign currency position and account for a wide range of central bank operations, including vis-à-vis residents, the first proxy to do so to our knowledge. The paper discusses the merits of the new proxy relative to coarser measures traditionally used like the change in reserves, and potential definitional differences with published data. The paper also presents stylized facts using our newly constructed FXI proxies.
Hong Kong Special Administrative Region, People's Republic of China --- Banks and Banking --- Foreign Exchange --- Money and Monetary Policy --- International Monetary Arrangements and Institutions --- Central Banks and Their Policies --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Monetary Policy --- Monetary economics --- Banking --- Currency --- Foreign exchange --- Reserve currencies --- Reserve positions --- Currencies --- International reserves --- Foreign exchange intervention --- Money --- Central banks --- Foreign exchange reserves
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What determines the currency to which countries peg or "anchor" their exchange rate? Data for over 100 countries between 1980 and 1998 reveal that trade network externalities are a key determinant. This implies that anchor currency choice may well be suboptimal in that certain currencies, e.g., the U.S. dollar, could be oversubscribed. It also implies that changes in anchor choices by a small number of countries can have large and rapid effects on the international monetary system. Other factors found to be related to anchor choice include the symmetry of output shocks and the currency denomination of liabilities.
Foreign exchange rates. --- Foreign exchange administration. --- Coinage, International. --- International coinage --- International money --- Money, International --- Exchange rates --- Fixed exchange rates --- Flexible exchange rates --- Floating exchange rates --- Fluctuating exchange rates --- Foreign exchange --- Rates of exchange --- Rates --- Currency question --- Monetary unions --- Money --- Exports and Imports --- Foreign Exchange --- Money and Monetary Policy --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Financial Aspects of Economic Integration --- Monetary economics --- Currency --- International economics --- Reserve currencies --- Currencies --- Exchange rate arrangements --- United States
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This paper provides an analytic overview of independent currency authorities (ICAs), sometimes called currency boards. ICAs issue and redeem domestic currency against an exchange standard on demand and back such operations through a 100 percent marginal foreign reserve cover. They also impose significant constraints on the banking system and the budget of the country that operates them. When supporting institutions have been put in place, ICAs appear to have promoted price stability, foreign trade, saving, and investment.
Banks and Banking --- Foreign Exchange --- Inflation --- Money and Monetary Policy --- Monetary Policy --- Monetary Policy, Central Banking, and the Supply of Money and Credit: Other --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Price Level --- Deflation --- Monetary economics --- Currency --- Foreign exchange --- Banking --- Macroeconomics --- Currencies --- Currency boards --- Reserve currencies --- Money --- Prices --- International reserves --- Central banks --- Banks and banking --- Foreign exchange reserves --- Singapore
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This paper examines the determinants of the currency composition of international reserves. Our single most important finding is the striking stability over time of the relationship between the demand for reserves denominated in different currencies and its principal determinants: trade flows, financial flows and currency pegs. This result contrasts sharply with recent predictions of sharp shifts in the currency composition of central banks’ holdings of foreign exchange. The message would seem to be that in this, as in other respects, the international monetary system is in a mode of gradual, continuous evolution, not of rapid, discontinuous change.
Banks and Banking --- Money and Monetary Policy --- Finance: General --- Foreign Exchange --- International Monetary Arrangements and Institutions --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Monetary Policy --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- General Financial Markets: General (includes Measurement and Data) --- Monetary economics --- Banking --- Finance --- Currencies --- International reserves --- Reserve currencies --- International monetary system --- Money --- Central banks --- International capital markets --- Financial markets --- Foreign exchange reserves --- International finance --- Banks and banking --- Capital market --- United States
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We document a decline in the dollar share of international reserves since the turn of the century. This decline reflects active portfolio diversification by central bank reserve managers; it is not a byproduct of changes in exchange rates and interest rates, of reserve accumulation by a small handful of central banks with large and distinctive balance sheets, or of changes in coverage of surveys of reserve composition. Strikingly, the decline in the dollar’s share has not been accompanied by an increase in the shares of the pound sterling, yen and euro, other long-standing reserve currencies and units that, along with the dollar, have historically comprised the IMF’s Special Drawing Rights. Rather, the shift out of dollars has been in two directions: a quarter into the Chinese renminbi, and three quarters into the currencies of smaller countries that have played a more limited role as reserve currencies. A characterization of the evolution of the international reserve system in the last 20 years is thus as ongoing movement away from the dollar, a recent if still modest rise in the role of the renminbi, and changes in market liquidity, relative returns and reserve management enhancing the attractions of nontraditional reserve currencies. These observations provide hints of how the international system may evolve going forward.
Macroeconomics --- Economics: General --- Money and Monetary Policy --- Banks and Banking --- Financial Risk Management --- International Finance: General --- Foreign Exchange --- International Monetary Arrangements and Institutions --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Monetary Policy --- International Financial Markets --- Economic & financial crises & disasters --- Economics of specific sectors --- Monetary economics --- Banking --- Finance --- Reserve currencies --- Money --- Currencies --- International reserves --- Central banks --- Reserves management --- Asset valuation --- Asset and liability management --- Currency crises --- Informal sector --- Economics --- Foreign exchange reserves --- Asset-liability management
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The paper examines the usage of the Renminbi (RMB) as an international payment currency. Globally, the use of RMB remains small, accounting for 2 percent of total cross-border transactions. Using country-level transaction data from Swift** for 2010–21, we find significant regional variations in the use of RMB for cross-border payments. While RMB is little used in some regions, it has gained traction in others, and these cross-country differences have widened over the years. Such differences can be partly explained by an economy’s geographic distance, political distance, and trade linkages with China. However, it also reflects the impact of policy measures by the People’s Bank of China, including establishing bilateral swap lines and offshore clearing banks. Both policy measures helped to address offshore RMB liquidity shortages given China’s overall capital account restrictions, with the offshore clearing banks having a quantitatively larger impact. Our analysis contributes to a better understanding of the growing importance of RMB within the international monetary system.
China, People's Republic of --- Macroeconomics --- Economics: General --- Money and Monetary Policy --- Banks and Banking --- Exports and Imports --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- International Monetary Arrangements and Institutions --- International Lending and Debt Problems --- Current Account Adjustment --- Short-term Capital Movements --- Economic & financial crises & disasters --- Economics of specific sectors --- Monetary economics --- Banking --- International economics --- Offshore financial centers --- Financial services --- Currencies --- Money --- Capital account --- Balance of payments --- Reserve currencies --- International monetary system --- Currency crises --- Informal sector --- Economics --- International finance
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Debates surrounding the adoption of a common currency have focused on its benefits weighed against the long-term costs of losing monetary independence. These debates have assumed that the penalty for not adopting a common currency is the maintenance of the status quo. This paper uses the Sjaastad model to analyze the price-making power of major currencies with regard to the prices of traded goods in small countries that have not adopted the euro and uses the Bayoumi-Eichengreen OCA index methodology to shed further light on changes in Europe. The empirical evidence suggests that small countries that have not adopted the euro have increasingly seen a change in the determinants of their traded goods prices. This seems to contrast with the experience of small countries that adopted the euro. The results need to be interpreted carefully, given the short time series.
Electronic books. -- local. --- Foreign exchange rates -- Europe. --- Monetary policy -- Europe. --- Finance --- Business & Economics --- International Finance --- Monetary policy --- Foreign exchange rates --- Exchange rates --- Fixed exchange rates --- Flexible exchange rates --- Floating exchange rates --- Fluctuating exchange rates --- Foreign exchange --- Rates of exchange --- Monetary management --- Rates --- Economic policy --- Currency boards --- Money supply --- Exports and Imports --- Foreign Exchange --- Money and Monetary Policy --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Financial Aspects of Economic Integration --- Trade Policy --- International Trade Organizations --- Monetary economics --- International economics --- Currency --- Currencies --- Monetary unions --- Plurilateral trade --- Reserve currencies --- Money --- International trade --- United States
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