Central Bank reserve creation in the era of negative money multipliers
Manmohan Singh, Peter Stella 07 May 2012
Are central banks printing vast quantities of money? This column explains how money-multiplier economics (central banks create reserves that allow commercial banks to create money) no longer holds. Today, non-bank financial institutions play a pivotal role in money/liquidity creation, but hold no reserves. Their lending depends on “private reserves”, mainly highly liquid government securities. Creating more ‘public’ reserves by buying such ‘private’ reserves doesn’t trigger money creation – it just substitutes among reserve types. Open-market purchases only create money if they swap a monetary base for assets that are no longer accepted at full value as collateral in the market.
The phenomenal increase in bank reserves that has resulted from central bank responses to the current financial crisis has led to considerable anxiety regarding a potentially explosive and uncontrollable future increase in inflation. Virtually identical concerns within the Federal Reserve in late 1935 motivated large increases in reserve requirements during 1936 and 1937; actions widely regarded as contributing to the sharp 1937-8 recession (see Friedman and Schwartz 1963).
monetary policy, Central Banks, reserves, money multiplier
Central banks and gold puzzles
Joshua Aizenman, Kenta Inoue 19 March 2012
The patterns of gold holding remain a debatable topic at times when the relative price of gold has appreciated while the global economy has experienced recessionary effects. This column studies the curious patterns of gold holding and trading by central banks from 1979 to 2010. It suggests that a central bank’s gold position signals economic might, and gold retains the stature of a ‘safe haven’ asset at times of global turbulence.
On 7 August 2009, the European Central Bank released the following Joint Statement on Gold:
Central Banks, reserves, Gold
The dollar question: Where are we?
Kati Suominen 09 July 2010
The global crisis has led some to question the dollar’s place as the dominant currency. This column discusses three camps in the literature: those advocating a new synthetic global currency, those arguing that a new reserve currency will emerge, and those suggesting a return to sharing the role. It concludes that talk of the dollar’s death – or even its decline – are exaggerated.
The global crisis and US economic travails triggered a firestorm debate on the future of the global currency regime.
Global governance International finance
dollar, reserves, global currency regime
Reserves and other early warning indicators work in crisis after all
Jeffrey Frankel, George Saravelos 01 July 2010
Can “early warning indicators” predict which countries are most vulnerable to a crisis? This column argues that, contrary to findings released last year, early warning indicators were useful in identifying which nations were hit hardest by the Global Crisis from 2008 to 2009. The authors argue that the level of central bank reserves was particularly useful. Other useful early warning indicators include real effective exchange rate overvaluation, current accounts, and national savings.
With aftershocks of the recent global financial earthquake still being felt in some parts of the world, it would be useful to have a set of “early warning indicators” to tell us what countries are most vulnerable. Many scholarly papers in the past have been devoted to identifying leading indicators of crises (e.g. Rose and Spiegel 2009a).
reserves, global crisis, early warning
Hedging against commodity prices and precautionary reserves
Eduardo Borensztein, Olivier Jeanne, Damiano Sandri 15 December 2009
Accumulating large foreign exchange reserves is a costly insurance strategy for developing countries. This column says that commodity-exporting countries might do better by hedging their risk with financial instruments, thereby reducing the need to hold precautionary reserves. Yet few do so.
The build-up of global imbalances has been driven in part by emerging market economies’ accumulation of large stocks of reserves – a trend that some authors view as self-insurance against volatility in international capital flows (Aizenman 2009, Aizenman and Sun 2009).1 Consistent with this view, Managing Director Dominique Strauss-Kahn recently declared that the IMF had the potential to contribute to the resolution o
global imbalances, reserves, commodity, hedging
Alternatives to sizeable hoarding of international reserves: Lessons from the global liquidity crisis
Joshua Aizenman 30 November 2009
The spectacular increase in hoarding of international reserves by emerging markets since the East Asian crisis has been one of the defining features of global imbalances. This column explores lessons from the crisis regarding alternatives to massive hoarding. It says that the crisis validates the need for external debt management policy and that the presence of fire-sale externalities associated with deleveraging, optimal external borrowing-tax cum international reserves hoarding-subsidy reduces the cost and the scale of hoarding international reserves.
The spectacular increase in hoarding of international reserves (IR) by emerging markets, in the aftermath of the East Asian crisis, has been one of the defining features of global imbalances (Summers 2006). This accumulation reflects, among other factors, the self insurance provided by international reserves against sudden stops and deleveraging crises (Aizenman and Lee 2007).
reserves, East Asia, sudden-stops
International reserve losses in the 2008-9 crisis: From “fear of floating” to the “fear of losing international reserves”?
Joshua Aizenman, Yi Sun 15 October 2009
Emerging markets accumulated massive international reserves over the last decade. This column explores how they used them to respond to the crisis. Economies that accumulated reserves for trade concerns drew them down in response to the shock, while economies driven by financial factors showed a “fear of depleting”.
Investigating the patterns of exchange rates, interest rates, and international reserves during 1970-1999, Calvo and Reinhart (2002) inferred the prevalence of the “fear of floating”. Countries that say they allow their exchange rate to float mostly do not. Instead, frequently the authorities are attempting to stabilise the exchange rate through direct intervention in the foreign exchange market and in open market operations.
reserves, international reserves, fear of floating, global crisis
Rapid and large liquidity funding for emerging markets
Guillermo Calvo, Rudy Loo-Kung 10 December 2008
Emerging markets are weaker than the G7, and if they undertake expansionary monetary and fiscal policies like the G7, inflation and capital flight are likely surge. This column argues international financial institutions must take an unprecedented role in bailing out emerging markets as there is the serious risk that they resort to protectionism and nationalisation.
One can blame the G7 for incompetent financial supervision, but few would criticise them for the rapid and decisive action taken by their central banks and fiscal authorities after the crisis materialised.
It is too early to tell if the G7 are coming out of the quagmire any time soon, but it is clear that the G7 have a powerful arsenal. The world is eager to buy their public bonds at negligible interest rates, which they can then use to pump in liquidity and bail out their financial sectors.
financial crisis, emerging markets, reserves
Asian exchange rate asymmetry
Victor Pontines, Ramkishen S. Rajan 19 November 2008
Why are emerging Asian economies accumulating massive foreign exchange reserve stocks? Much research has focused on precautionary or export-promoting motives. This column argues that emerging economies are pursuing exchange rate management with a strong bias towards preventing appreciation.
Following Calvo and Reinhart (2002), it has become commonplace to argue that there is a “fear of floating” among emerging economies in Asia and elsewhere. However, the sustained reserve build-up in emerging Asian economies since 2000 until 2008 (with the onset of the global financial crisis) suggests that they are more sensitive to exchange rate appreciation than depreciation.
Exchange rates Macroeconomic policy
sovereign wealth funds, reserves, Asia, fear of floating
The IMF as a reserve manager
Michael Bordo, Harold James 18 June 2008
The IMF needs a new job. This column makes the case for the bold proposal that the IMF should manage a significant part of the new surplus countries’ sovereign wealth funds.
In the original conception of the 1944 Bretton Woods Conference, the International Monetary Fund (IMF) was created to deal with problems that had afflicted the interwar world, particularly the lopsided distribution of reserves and the deflationary consequences for the international economy – as well as with crisis management. Today the IMF has been almost completely sidelined from many of the major governance issues of the international financial system. In particular, it is much less active as a financial institution.
IMF, reserves, crisis management