Showing papers on "Currency published in 2019"

Exchange Arrangements Entering the Twenty-First Century: Which Anchor will Hold?

Abstract: This article provides a comprehensive history of anchor or reference currencies, exchange rate arrangements, and a new measure of foreign exchange restrictions for 194 countries and territories over 1946-2016. We find that the often cited post-Bretton Woods transition from fixed to flexible arrangements is overstated; regimes with limited flexibility remain in the majority. Even if central bankers' communications jargon has evolved considerably in recent decades, it is apparent that many still place a large implicit weight on the exchange rate. The U.S. dollar scores as the world's dominant anchor currency by a very large margin. By some metrics, its use is far wider today than 70 years ago. In contrast, the global role of the euro appears to have stalled. We argue that in addition to the usual safe assets story, the record accumulation of reserves since 2002 may also have to do with many countries' desire to stabilize exchange rates in an environment of markedly reduced exchange rate restrictions or, more broadly, capital controls: an important amendment to the conventional portrayal of the macroeconomic trilemma.

The Quanto Theory of Exchange Rates

Abstract: We present a new identity that relates expected exchange rate appreciation to a risk-neutral covariance term, and use it to motivate a currency forecasting variable based on the prices of quanto index contracts. We show via panel regressions that the quanto forecast variable is an economically and statistically significant predictor of currency appreciation and of excess returns on currency trades. Out of sample, the quanto variable outperforms predictions based on uncovered interest parity, on purchasing power parity, and on a random walk as a forecaster of differential (dollar-neutral) currency appreciation.

Cash use across countries and the demand for central bank digital currency

Abstract: The level and trend in cash use in a country will influence the demand for central bank digital currency (CBDC). While access to digital currency will be more convenient than traveling to an ATM, it only makes CBDC like a bank debit card—not better. Demand for digital currency will thus be weak in countries where cash use is already very low, due to a preference for cash substitutes (cards, electronic money, mobile phone payments). Where cash use is very high, demand should be stronger, due to a lack of cash substitutes. As the demand for CBDC is tied to the current level of cash use, we estimate the level and trend in cash use for 11 countries using four different measures. A tentative forecast of cash use is also made. After showing that declining cash use is largely associated with demographic change, we tie the level of cash use to the likely demand for CBDC in different countries. In this process, we suggest that one measure of cash use is more useful than the others. If cash is important for monetary policy, payment instrument competition, or as an alternative payment instrument in the event of operational problems with privately supplied payment methods, the introduction of CBDC may best be introduced before cash substitutes become so ubiquitous that the viability of CBDC could be in doubt.

Forward and Spot Exchange Rates in a Multi-currency World

Abstract: Separate literatures study violations of uncovered interest parity (UIP) using regression-based and portfolio-based methods. We propose a decomposition of these violations into a cross-currency, a between-time-and-currency, and a cross-time component that allows us to analytically relate regression-based and portfolio-based facts and to estimate the joint restrictions they put on models of currency returns. Subject to standard assumptions on investors’ information sets, we find that the forward premium puzzle (FPP) and the “dollar trade” anomaly are intimately linked: both are driven almost exclusively by the cross-time component. By contrast, the “carry trade” anomaly is driven largely by cross-sectional violations of UIP. The simplest model that the data do not reject features a cross-sectional asymmetry that makes some currencies pay permanently higher expected returns than others, and larger time series variation in expected returns on the U.S. dollar than on other currencies. Importantly, conventional estimates of the FPP are not directly informative about expected returns because they do not correct for uncertainty about future mean interest rates. Once we correct for this uncertainty, we never reject the null that investors expect high-interest-rate currencies to depreciate, not appreciate.

The use of cryptocurrencies in the money laundering process

Abstract: This paper aims to analyze the money laundering process itself, how cryptocurrencies have been integrated into this process, and how regulatory and government bodies are responding to this new form of currency.,This paper is a theoretical paper that discusses cryptocurrencies and their role in the money laundering process.,Cryptocurrencies eliminate the need for intermediary financial institutions and allow direct peer-to-peer financial transactions. Because of the anonymity introduced through blockchain, cryptocurrencies have been favored by the darknet and other criminal networks.,Cryptocurrencies are a nascent form of money that first arose with the creation of bitcoin in 2009. This form of purely digital currency was meant as a direct competitor to government-backed fiat currency that are controlled by the central banking system. The paper adds to the recent discussions and debate on cryptocurrencies by suggesting additional regulation to prevent their use in money laundering and corruption schemes.

Money and the Commons: An Investigation of Complementary Currencies and their Ethical Implications

Abstract: The commons is a concept increasingly used with the promise of creating new collective wealth. In the aftermath of the economic and financial crises, finance and money have been criticized and redesigned to serve the collective interest. In this article, we analyze three types of complementary currency (CC) systems: community currencies, inter-enterprise currencies, and cryptocurrencies. We investigate whether these systems can be considered as commons. To address this question, we use two main theoretical frameworks that are usually separate: the “new commons” in organization studies and the “common good” in business ethics. Our findings show that these monetary systems and organizations may be considered as commons under the “common good” framework since they promote the common interest by creating new communities. Nevertheless, according to the “new commons” framework, only systems relying on collective action and self-management can be said to form commons. This allows us to suggest two new categories of commons: the “social commons,” which fit into both the “new commons” and the “common good” frameworks, and the “commercial commons,” which fit the “common good” but not the “new commons” framework. This research advances a new conceptualization of the commons and of the ethical implications of CCs.

Blacklists, Market Enforcement, and the Global Regime to Combat Terrorist Financing

Abstract: This paper highlights how international organizations can use global performance indicators (GPIs) to drive policy change through transnational market pressure. When international organizations are credible assessors of state policy, and when monitored countries compete for market resources, GPIs transmit information about country risk and stabilize market expectations. Under these conditions banks and investors may restrict access to capital in noncompliant states and incentivize increased compliance. I demonstrate this market-enforcement mechanism by analyzing the Financial Action Task Force (FATF), an intergovernmental body that issues nonbinding recommendations to combat money laundering and the financing of terrorism. The FATF's public listing of noncompliant jurisdictions has prompted international banks to move resources away from listed states and raised the costs of continued noncompliance, significantly increasing the number of states with laws criminalizing terrorist financing. This finding suggests a powerful pathway through which institutions influence domestic policy and highlights the power of GPIs in an age where information is a global currency.

From Commodity to Fiat and Now to Crypto: What Does History Tell Us?

Abstract: Over time, there has been a tendency for political jurisdictions and residents to converge on a single currency. Monopoly over seigniorage is a source of political power and a valuable lifeline when sovereignty is threatened. Moreover a uniform currency, insofar as it is free of counterparty and liquidity risk, facilitates economic activity. But will digital currencies now reverse this trend toward uniformity, given the apparent ease with which they can be created? The information sensitivity of those units, evident in the fact that they trade at varying prices, suggests that they do not yet provide the core functions of money. So-called stable coins are intended to bridge this gap, but whether they can be successfully scaled up and maintain their stability is doubtful. The one unit that can clearly meet these challenges is central bank digital currency. But there would be both costs and benefits of moving in this direction.

The International Monetary and Financial System

Abstract: International currencies fulfill different roles in the world economy, with important synergies across those roles. We explore the implications of currency hegemony for the external balance sheet of the United States, the process of international adjustment, and the predictability of the US dollar exchange rate. We emphasize the importance of international monetary spillovers and of the exorbitant privilege, and we analyze the emergence of a new Triffin dilemma.

The Currency Composition of Sovereign Debt

Abstract: The currency composition of sovereign external debt in emerging market economies is tilted towards foreign currency and the share of debt denominated in local currency is highly pro-cyclical. We study these facts through the lens of a quantitative model of optimal currency-composition of sovereign debt when the government lacks commitment regarding monetary policy. High levels of debt in local currency give rise to incentives to dilute debt repayment through nominal currency depreciation. Governments tilt the currency-composition of debt towards foreign currency to avoid the inflationary costs associated with currency depreciation. This is done at the expense of foregoing the hedging properties of debt in local currency. The cyclicality of the currency-composition of sovereign debt responds to the cyclical properties of the benefits associated to debt dilution, which are higher in recessions. Inflation-linked bonds do not eliminate the time inconsistency problem of monetary policy.

Social computing in currency exchange

Abstract: Human communication has evolved over the last decades thanks to rapid technological advances. It has provided us with new ways of communicating with one another and made many aspects of social interaction easier. Social computing is an important area in computer science concerned with the use of computational systems for social purposes. This paper focuses on the use of social computing to simplify the process of currency exchange at airports where services have to be provided to people of all nationalities. This is a complex social scenario in which the buyer and seller must reach an agreement without speaking the same language, and in these cases, the probability of not understanding all the aspects of the transaction is high. The proposed system improves interaction between users and ensures a fast and secure operation. A multi-agent system is the base of the developed software; MAS is an important and commonly used tool in social computing. A case study was conducted with the proposed system at Sydney airport, with a Spanish currency exchange company (Global Exchange) which provides service to travelers from all continents. The Net Promoter Score metric was used to evaluate the developed system, and a score of 29.81 was obtained, indicating that customers were highly satisfied with the performance of the system. Moreover, thanks to the system, there was an increase of 34% in currency exchange operations, and the time it takes to provide service to a customer reduced by 73.67% on average.

Does the Baltic Dry Index drive volatility spillovers in the commodities, currency, or stock markets?

Abstract: This study examines the spillover effect of the Baltic Dry Index (BDI) on the commodities futures, currency, and stock markets by using a tri-variate VAR-BEKK-GARCH-X model on a dataset from October 1, 2007 to October 31, 2018. Results reveal that the BDI spillover effect is time-varying. The spillover effect of the BDI was insignificant during the whole sample period but significant during the 2008/2009 global financial tsunami, and its influence increased during the 2014–2016 economic slowdown in China. The BDI serves as a short-term rather than long-term indicator for the commodities, currency, and equity markets, especially during financial crises.

Exchange Rates, Foreign Currency Exposure and Sovereign Risk

Abstract: We quantify the causal link between exchange rate movements and sovereign risk of 16 major emerging market economies (EMEs) by means of structural vector autoregressive models (SVARs) using data from 10/2004 through 12/2016. We apply a novel data based identification approach of the structural shocks that allows to account for the complex interrelations within the triad of exchange rates, sovereign risks and interest rates. We find that the direction and size of the response of sovereign risk to FX rate movements depend on the type of exchange rate measure we look at and on the size of the net foreign currency exposure of an economy. A depreciation of the domestic currency against the USD increases sovereign risk. In contrast, a depreciation of the effective exchange rate turns out to have only a significant effect on sovereign risk for countries with large negative net foreign currency exposures of the private sector. In this case, a depreciation of the NEER also induces an increase in sovereign risk. We conclude that the 'financial channel' is more important in the transmission of exchange rate shocks to sovereign risk in comparison with the traditional 'net trade channel'.

Covered Interest Parity Deviations: Macrofinancial Determinants

Abstract: For about three decades until the Global Financial Crisis (GFC), Covered Interest Parity (CIP) appeared to hold quite closely—even as a broad macroeconomic relationship applying to daily or weekly data. Not only have CIP deviations significantly increased since the GFC, but potential macrofinancial drivers of the variation in CIP deviations have also become significant. The variation in CIP deviations seems to be associated with multiple factors, not only regulatory changes. Most of these do not display a uniform importance across currency pairs and time, and some are associated with possible temporary considerations (such as asynchronous monetary policy cycles).

The Term Structure of Currency Carry Trade Risk Premia

Abstract: We nd that average returns to currency carry trades decrease signicantly as the maturity of the foreign bonds increases, because investment currencies tend to have small local bond term premia. The downward term structure of carry trade risk premia is informative about the temporal nature of risks that investors face in currency markets. We show that long-maturity currency risk premia only depend on the domestic and foreign permanent components of the pricing kernels, since transitory currency risk is automatically hedged by interest rate risk for long-maturity bonds. Our