The Success of Currency Reforms to End Great Inflations: An Empirical Analysis of 34 High Inflations

Abstract. The estimation of an ordered probit model for currency reforms attempting to end 31 hyperinflations and three huge inflations of the twentieth century shows that the introduction of an independent central bank and the adoption of a credibly fixed exchange rate are crucial for the success of a currency reform. In addition, currency reforms are demonstrated to be more difficult in centrally planned economies than in market economies.     

Optimal monetary policy regime for oil producing developing economies: Implications for post-war Iraq

This paper theoretically investigates optimal monetary policy regime for oil producing developing countries. We analyze credibility and reputation of the Central Bank and macroeconomic dynamics under alternative monetary policy regimes. We construct a detailed and realistic model that can be used to analyze macroecomic structure and expectation dynamics of an oil producing open economy. We take into account the asymmetric information between the public and the central bank and theoretically investigate how this asymmetric information impacts the real economy and the credibility of the central bank. The simulation results indicate that central bank achieves higher credibility and lower inflation under dollarization and higher output levels under currency board regime. The model constructed in this paper has many policy implications for oil producing open economies. Using the implications of the model, we make monetary policy regime recommendations for post-war Iraq.     

Public debt indexation and denomination with an independent central bank

This paper examines the interaction between public debt management and the design of monetary institutions. The analysis shows that delegation of monetary policy to an independent central bank is more effective in containing inflationary expectations than the use of foreign currency or inflation-indexed debt. If delegation of monetary policy is viable, the optimal policy is to issue nominal debt. This increases the sensitivity of taxes and output to unexpected inflation, thus minimizing the inflation needed to offset supply shocks. Evidence on central bank independence, debt composition and output variability suggests that the normative argument has some positive content.     

Surplus liquidity,central bank losses and the use of reserve requirements in emerging markets

Since the turn of the millennium, stocks of foreign reserves held by central banks in many emerging markets and developing countries have exceeded currency in circulation. To steer money market rates, these central banks have been absorbing liquidity from, rather than providing it to, the banking sector in their regular monetary policy operations. When interest rates in countries with major reserve currencies are low, the yield on foreign reserves is low. A higher interest rate on liquidity‐absorbing operations may expose central banks to losses. Although a central bank is not a profit‐maximizing institution, central bank losses can undermine the independence of the central bank. Using data for a large panel of central banks, this paper provides some evidence that central banks tend to apply low‐remunerated reserve requirements when profitability is at stake.     

中央银行在应对经济危机中的作用及局限——马克思的论述及其当代价值

马克思以英格兰银行为例,深入地研究了中央银行在应对资本主义经济危机中的作用,其主要思想可以概括为三个方面.一是中央银行具有国家货币管理机构和信用枢纽的双重性质,这决定了中央银行有应对经济危机的内在职能.二是存在两种货币危机,即货币资本运动引发的"特种危机"和"任何危机的一个阶段".针对"特种危机",中央银行的应对措施既...     

Central Bank Independence and the Cost of Disinflation: Why the Wage Contracts Length Matters?

Recent empirical contributions demonstrate that countries with less independent central banks enjoy lower output losses during disinflationary cycles. To explain these somewhat surprising empirical findings, some authors suggest that independent central banks probably face a flatter short-run Phillips curve. In this paper, we provide both theoretical and empirical arguments to rationalize this intuition. We demonstrate that, since central bank independence reduces the mean inflation rate and its variance, wage setters opt for a lower degree of nominal wage indexation leading to more wage and price inertia and, thus, to a flatter short-run Phillips curve. Consequently, this paper put forward a channel of positive influence of central bank independence on the sacrifice ratio through its impact on nominal wage indexation. Empirical tests, performed using a sample of 19 OECD countries during the 1960–1990 period, show that these theoretical results hold also empirically.     

Efficient payments: How much do they cost for the Central Bank?

Previous works related to optimal denominations for coins and banknotes consider that the “principle of least effort” that defines an efficient payment is the most important criterion for two main reasons. Firstly, it is more convenient for transactors and, secondly, it limits the production costs of denominations incurred by the central bank. Exploiting production cost data for the U.S. currency system in 2010, we show using simulations that efficient payments actually increase the annual production costs of the Federal Reserve by $156 million. As a consequence, we raise a larger issue for central banks which consists in issuing an efficient denominational mix that is more convenient for transactors and that reduces the production costs of denominations.     

Bargaining structure and nominal wage flexibility

In a model with wage setting by monopoly unions and monetary policy conducted by a central bank, the duration of nominal wage contracts is shown to be u-shaped in the degree of centralization, with intermediate bargaining systems yielding contracts of shorter duration and thus, more flexible nominal wages than both decentralized and centralized systems. The theoretical predictions of the model are tested on OECD data, and there is empirical support for the main results on contract length.     

The Government's Foreign Debt in the Argentine Crisis

Though the government had adopted a currency board regime since 1991, the Argentine economy suffered a currency crisis in 2002. It is shown that currency crises can arise, even under currency board systems in which the central bank has enough international reserves to respond to arbitrary withdrawals by individuals. The model implies that a government's rapid accumulation of foreign debt should be included as a major predictor of currency crises.     

Implementing optimal monetary policy: Objectives and rules

The inconsistency of optimal policy comes from inconsistency between the social loss function and the economic structure. Accordingly, this paper designs a central bank loss function, which proves consistent with the economic structure. Under the designed central bank loss function discretionary policy proves optimal for social welfare. Optimal discretionary policy emerges because the implied behavioral equation is identical with that under commitment to the social loss function. Consequently, this paper also designs policy rules. To some extent, policy rules appear more basic, flexible, and operational than social and central bank loss functions, but the social loss function serves as an ultimate objective and the central bank loss function explicitly identifies the attainable targets and appropriate weight to achieve the social optimum.     

储备型汇率制度:发行非国际货币的发展中国家(地区)之选择

国际货币与非国际货币之区分构成了当前国际金融体系典型的非对称特征。该种区分必将影响不同国家间汇率及汇率制度的选择。本文试图提出一种观点:发行非国际货币的发展中国家所选择的汇率制度可以形容为"储备型汇率制度"。在该种制度下,中央银行对外汇市场不断进行干预以实现其国际货币储备的不断积累,由此而造成本币长期贬值(或低估)和贸易的持续顺差。该种观点不仅与当今世界汇率与汇率制度分布之事实相一致,而且还可通过一个反映发展中国家中央银行行为的动态优化模型进行严格的理论证明。尽管"储备型汇率制度"可能与当前IMF所规定的反"货币操纵"条款相冲突,但是在当前这种不公正和非对称的国际货币体系下,该制度无疑是发展中国家的最优选择。     

The intraday liquidity management game

We use a game theoretical framework to analyze the intraday behavior of banks with respect to settlement of interbank claims in a real-time gross settlement setting. The game played by banks depends upon the intraday credit policy of the central bank and it encompasses two well-known game theoretical paradigms: the prisoner's dilemma and the stag hunt. The former arises in a collateralized credit regime where banks have an incentive to postpone payments when daylight liquidity is costly, an outcome that is socially inefficient. The latter arises in a priced credit regime where the postponement of payments can be socially efficient. Banks are risk neutral, but we show that most of the results are unaffected by risk aversion.     

Endogenous inflows of speculative capital and the optimal currency appreciation path

Abstract This paper examines the optimal appreciation path of an undervalued currency in the presence of speculative capital inflows that are endogenously affected by the appreciation path. A central bank decides its appreciation policy based on three costs: (i) misalignment costs associated with the gap between the actual and long‐run equilibrium exchange rates, (ii) short‐term adjustment costs due to resource reallocation, and (iii) capital losses due to speculative capital inflows. Our model finds (1) when speculators face no liquidity shocks, the central bank tends to appreciate the currency quickly to discourage speculative capital; (2) when speculators face liquidity shocks, the central bank optimally pre‐commits to a slower appreciation path, and the appreciation takes the longest time when the probability of liquidity shocks takes intermediate values; (3) the central bank tends to appreciate the currency more quickly when it conducts discretionary policy.     

More effective than we thought: Central bank independence and inflation in developing countries

This study examines the effect of legal central bank independence on inflation in developing countries. In spite of the policy consensus suggesting that central bank independence is an effective tool to control inflation, the evidence is still limited, particularly for developing countries. Using a novel dataset, we analyze the effect of central bank independence on inflation for a sample of 118 developing countries between 1980 and 2013. We find that higher central bank independence is associated with lower inflation rates. This effect on inflation is stronger the more democratic a country is, but it is also present in non-democratic countries. Our results are robust to different specifications and methodologies. Furthermore, we find that all dimensions included in the measurement of central bank independence (objectives, personnel, policy, and financial independence) contribute to curb inflation. Our results shed light on which types of reforms may be more effective at fighting inflation in developing countries.     

Monetary policy credibility and macrodynamics: evidence from Ghana

We compute a time-varying metric of monetary policy credibility based on Ghana’s experience, using both symmetric and asymmetric approaches. We then follow-up with some empirical evidence to address the linkages between macroeconomic developments and central bank credibility. The empirical results reveal high and low credibility cycles with an average duration of 2 years over the study period. Particularly, higher levels of credibility were associated with stable domestic currency and lower nominal interest rates. This reinforces the notion that efficient monetary policy delivers higher central bank credibility with better outcomes for macroeconomic variables. In contrast, the level of credibility tends to worsen in the wake of weakening macro fundamentals which are not adequately countered by monetary policy decisions. There is therefore the need for efficient monetary policy formulation to achieve a stable macroeconomic environment in Ghana. This will in the long-run build policy credibility towards attaining the central bank’s medium-term inflation target.     

Inflation, government transfers, and optimal central bank independence

The problem of monetary policy delegation is formulated as a two-stage non-cooperative game between the government and the central bank. The solution to this policy game determines the optimal combination of central bank conservatism and independence. The results show that the optimal institutional design always requires some degree of central bank independence and that there is substitutability between central bank independence and conservatism. The results also show that partial central bank independence can be optimal and that there are circumstances under which it is optimal for the government to appoint a liberal central banker.     

Political influence,central bank independence and inflation in Africa: A comparative analysis

This paper develops a new de facto measure of central bank independence (CBI) based on two recent measures of the turnover rates of central bank governors introduced by Vuletin and Zhu (2011), complemented with measures of alliance with the government in power, captured by prior executive appointment, tribe proximity, and political party affiliation. Using 1980–2009 data from 13 countries from the CFA zone (a currency union) and 18 non-CFA countries, the new index is used to 1) examine whether CBI can help achieve price stability in Africa and 2) show how CBI affects African countries that are part of a monetary union. We find that higher turnover rates lead to higher inflation. Our results are robust to the decomposition of the turnover rates into premature removals and ally replacements. Furthermore, we find that for CFA zone countries, central bank autonomy has no effect on inflation and instead inflation is driven by other variables such as the fixed exchange rate regime or commodity price shocks.     

Signalling commitment with monetary and inflation targets

This article studies a two-period game between the public and a central bank about whose ability to commit to an announced target the public is uncertain. The central bank chooses between announcing a target for an intermediate variable (money growth) and its goal variable, inflation. Prior to setting its instrument, the central bank receives private, noisy information about the link between money growth and inflation. Monetary targeting facilitates communication of the central bank's type, in that the probability of separation is always higher than under inflation targeting. This advantage of monetary targets from a dependable central bank's perspective is outweighed for most parameter values by the advantage of inflation targeting in terms of inflation control. If the regime choice is treated as a strategic decision, over a large range of parameter values both central banks choose the regime that a dependable central bank would prefer.     

Currency demand,new technology,and the adoption of electronic money: Micro evidence from Japan

We estimate currency demand functions conditional on electronic money adoption with household-level survey data from Japan under an Instrumental Quantile Regression framework. Contrary to theoretical predictions, our results suggest that users of electronic money hold more currency than non-users.     

On the socially optimal density of coin and banknote series: Do production costs really matter?

By adding denominations to their coin and banknote series central banks can increase the efficiency of cash payments. In practice, however, they opt for a denominational structure with a relatively low density. The literature holds that this is because of the production costs involved. To test this proposition, we introduce a per-denomination fixed cost into the matching model of Lee et al. (2005) and parameterize the model with data on the production of US dollar banknotes. Our simulations demonstrate that central banks could increase the density of their currency systems beyond the observed level without the efficiency gains for transactors being dwarfed by the additional production costs for the central bank itself. This suggests that the explanation for the low density rather lies with costs incurred by consumers and merchants - and anticipated by central banks - that are not yet in any of the extant models.