DOCSLIB.ORG

THE HIERARCHY of the OFFSHORE US-DOLLAR SYSTEM on Swap Lines, the FIMA Repo Facility and Special Drawing Rights

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
THE HIERARCHY of the OFFSHORE US-DOLLAR SYSTEM on Swap Lines, the FIMA Repo Facility and Special Drawing Rights Global Economic Governance Initiative GEGI STUDY | February 2021 THE HIERARCHY OF THE OFFSHORE US-DOLLAR SYSTEM On Swap Lines, the FIMA Repo Facility and Special Drawing Rights Steffen Murau, Fabian Pape and Tobias Pforr Funded by German Research Foundation Global Economic Governance Initiative GEGI STUDY | February 2021 THE HIERARCHY OF THE OFFSHORE US-DOLLAR SYSTEM On Swap Lines, the FIMA Repo Facility and Special Drawing Rights Steffen Murau, Fabian Pape and Tobias Pforr Funded by German Research Foundation Table of Contents Abbreviations v Executive Summary vi Acknowledgments vii 1. Introduction 01 2. The Fed’s Central Bank Swap Lines 08 Outline 08 Historical overview 08 Technical details 09 Summary 10 3. The Fed’s FIMA Repo Facility 11 Outline 11 Historical overview 11 Technical details 13 Summary 14 4. The Special Drawing Rights System 15 Outline 15 Historical overview 15 Technical details 17 Summary 20 5. Conclusion 21 References 23 About the Authors 27 iii List of Figures and Tables Figure 1 — The hierarchy of the global Offshore US-Dollar System 04 Figure 2 — Assessing the international role of the US-Dollar in 2019-20 07 Figure 3 — Drawings on Fed swap lines, volume and price (2007-20) 09 Figure 4 — Balance sheet mechanism for central bank swap issuance 10 Figure 5 — Investment in the Fed's Foreign Repo Pool (2007-20) 12 Figure 6 — US treasury bond holdings of selected non-US central banks 13 Figure 7 — Balance sheet mechanism for foreign repo facilities 14 Figure 8 — Three historical rounds of SDR allocation, in SDR billion 16 Figure 9 — Balance sheet mechanism for SDR allocation 17 Figure 10 — Balance sheet mechanism for SDR drawing via first layer 18 Figure 11 — Balance sheet mechanism for SDR drawing via apex 18 Figure 12 — SDR drawings in relation to total SDR holdings (2007-20) 19 Figure 13 — Administrative process for SDR drawing (in working days) 20 Figure 14 — Borrowing costs via swap lines, the FIMA repo facility and SDRs 22 Table 1 — Comparison of the three mechanisms 21 iv Abbreviations BCEAO Banque Central des États de l'Afrique de l'Ouest GRA General Resource Account BD Bangladeshi IASS Institute for Advanced Sustainability Studies BIS Bank for International Settlement IMF International Monetary Fund BoC Bank of Canada IOER Interest on Excess Reserves BoE Bank of England IPE International Political Economy BoJ Bank of Japan JPY Japanese Yen C6 Swap network of six central banks LDC Low-Income Developing Countries C14 Recipients of Federal Reserve Swap Lines NCB National Eurozone Central Bank CBoB Central Bank of Bangladesh OBFAs Off-balance-sheet fiscal agencies CBoR Central Bank of Russia OIS Overnight Indexed Swap CN Chinese PBoC People's Bank of China COFER Currency Composition of Official Foreign QE Quantitative Easing Exchange Reserves RFA Regional Financing Arrangement DFG Deutsche Forschungsgemeinschaft RMB Chinese Renminbi EAEPE European Association for Evolutionary Political RRP Reverse Repos Economy RU Russian ECB European Central Bank SDR Special Drawing Rights (as instruments) EME Emerging Market Economies SN Senegalese ESF Exchange Stabilization Fund SNB Swiss National Bank ESRC Economic and Social Research Council SOMA System Open Market Account EUI European University Institute US United States EUR Euro USD US-Dollar EZ Eurozone VTA Voluntary Trading Arrangementr FDIC Federal Deposit Insurance Corporation Fed Federal Reserve $ US-Dollar FIMA Foreign and International Monetary Authorities € Euro FOMC Federal Open Market Committee ¥ Japanese Yen FRBNY Federal Reserve Bank of New York 元 Chinese Renminbi F-RRP Foreign Reverse Repo ₽ Russian ruble FX Foreign exchange ৳ Bangladeshi taka GBP British pound f West African CFA franc GDP Global Development Policy x Special Drawing Rights (as unit of account) GFSN Global Financial Safety Net ¤ Other units of account v Executive Summary he view that the international monetary system is Currently, there are three different mechanisms hierarchical has become increasingly common in for non-US central banks to access the Fed's balance TInternational Political Economy (IPE) scholarship. sheet to attain emergency USD liquidity. These create However, the nature, shape and origin of this hierarchy three peripheral layers in the Offshore USD System. remain often vague. Is it a hierarchy of currencies, The first-layer periphery can receive emergency states, or monetary jurisdictions? What determines USD liquidity via the Fed's central bank swap lines. hierarchy empirically? And what are its causes? With this mechanism, set up during the 2007-9 This study conceptualizes international monetary Financial Crisis, the Fed stands ready to create new hierarchy by focusing on different mechanisms to USD-denominated central bank deposits on demand, supply emergency US-Dollar (USD) liquidity from the while accepting deposits of the partnering central Federal Reserve (Fed) to non-US central banks. To banks as collateral, which are denominated in their this end, it takes on board insights of critical macro- respective unit of account and created on the spot. finance and develops a model of the global financial The second-layer periphery can make use of the architecture as a web of interlocking balance sheets. Fed's new repo facility for Foreign and International We perceive the international monetary system Monetary Authorities (FIMA) to access emergency as a world-spanning payments system in which daily USD liquidity. Set up in March 2020, the Fed creates money flows are settled mainly through interactions new central bank deposits on the spot against US of private financial institutions. In its current shape, treasury bonds which non-US central banks have to we call it the 'Offshore USD System' as it is based on accumulate beforehand and pledge as collateral. using and creating USD-denominated credit money The third-layer periphery can access emergency instruments ‘offshore’, i.e. outside the US. USD liquidity from the Fed only via the Special Drawing The centrality of the USD as global 'key currency' Rights (SDR) system, set up in 1969 and administered places the US monetary jurisdiction at the apex of the by the International Monetary Fund (IMF). Non- global payments system. It enables US institutions to US central banks have to sell previously allocated provide the ultimate means of settlement and makes SDR holdings and can interact with the Exchange the Fed the system's hierarchically highest balance Stabilization Fund (ESF), which acts as gatekeeper for sheet. At the same time, it pushes all other monetary the Fed. New central bank deposits are only created if jurisdictions into a peripheral position. the Fed buys SDR Certificates issued by the ESF. While private credit money creation is the default This is the first study to integrate swap lines, the mechanism in normal times, central banks become FIMA repo facility and the SDR system into a single paramount when private credit money instruments framework of interlocking balance sheets. It clarifies are about to endogenously implode in a crisis. Private the functional relationship between the Fed and the institutions have mechanisms to supply emergency IMF in the Offshore USD System. While the Fed is USD liquidity to each other in smaller crises, but in a the hierarchically highest balance sheet in the global larger systemic crisis public credit money becomes payments system and ultimate source for emergency essential for the provision of emergency USD liquidity. USD liqudity, we interpret the IMF as an off-balance- The international hierarchy below the apex is sheet fiscal agency in the US monetary jurisdiction. determined by the mechanisms through which non-US Our analysis of the three mechanisms has the central banks can access emergency USD liquidity from potential to contribute to future research in various the Fed. Not only are they important when they are strands of IPE. Insights into the nature, shape and actually used in systemic crises but they also matter in causes of international hierarchy are of relevance normal times. Peripheral monetary jurisdictions which to the literature on the Global Financial Safety Net are higher up in the international hierarchy receive a (GFSN), studies on the changing role of the IMF, more favorable implicit liquidity guarantee that grants a analyses of the international role of the USD, as well higher elasticity space to their banking systems. as theories on international monetary power. vi Acknowledgments his study is part of the research project 'Hierarchical and Hybrid Money on a Fractured Continent: Europe’s Monetary Architecture after the Eurocrisis' (2019-21), funded by Deutsche Forschungsgemeinschaft T(DFG) and carried out at the Global Development Policy (GDP) Center of Boston University. Adopting an institutionalist research paradigm by using the conceptual framework of interlocking balance sheets, the analytical interest of the project is to examine the international and European financial architecture as a genuine credit money system. The study applies the methodology developed in the first piece of the series, titled 'A Macro-financial Model of the Eurozone Architecture Embedded in the Global Offshore US-Dollar System', to investigate how central bank swap lines, the FIMA repo facility and the Special Drawing Rights (SDR) system create a hierarchy among different monetary jurisdictions in the global financial architecture. Our collaboration has greatly benefited from Steffen Murau’s Research Fellowship at the Bank for International Settlement (BIS) and
Load more

Recommended publications
  • Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States
    REPORT TO CONGRESS Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States U.S. DEPARTMENT OF THE TREASURY OFFICE OF INTERNATIONAL AFFAIRS December 2020 Contents EXECUTIVE SUMMARY ......................................................................................................................... 1 SECTION 1: GLOBAL ECONOMIC AND EXTERNAL DEVELOPMENTS ................................... 12 U.S. ECONOMIC TRENDS .................................................................................................................................... 12 ECONOMIC DEVELOPMENTS IN SELECTED MAJOR TRADING PARTNERS ...................................................... 24 ENHANCED ANALYSIS UNDER THE 2015 ACT ................................................................................................ 48 SECTION 2: INTENSIFIED EVALUATION OF MAJOR TRADING PARTNERS ....................... 63 KEY CRITERIA ..................................................................................................................................................... 63 SUMMARY OF FINDINGS ..................................................................................................................................... 67 GLOSSARY OF KEY TERMS IN THE REPORT ............................................................................... 69 This Report reviews developments in international economic and exchange rate policies and is submitted pursuant to the Omnibus Trade and Competitiveness Act of 1988, 22 U.S.C. § 5305, and Section
    [Show full text]
  • Central Bank Survey of Foreign Exchange and Derivatives Market Activity
    FR 3036 OMB No. 7100-0285 Hours per Response: 55.0 Approval expires: May 31, 2022 Instructions for the Central Bank Survey of Foreign Exchange and Derivatives Market Activity Turnover Survey April 2019 FR 3036 OMB No. 7100-0285 This report is authorized by law (12 U.S.C. §§ 225a and 263). Your voluntary cooperation in submitting this report is needed to make the results comprehensive, accurate and timely. The Federal Reserve may not conduct or sponsor, and an organization is not required to respond to, a collection of information unless it displays a currently valid OMB control number. The Federal Reserve System regards the individual institution information provided by each respondent as confidential [5 U.S.C. §552(b)(4)]. If it should be determine d that any information collected on this form must be released, other than in the aggregate in ways that will not reveal the amounts reported by any one institution, respondents will be notified. Public reporting burden for this collection of information is estimated to be 55 hours per response, including time to gather and maintain data in the proper form, to review instructions and to complete the information collection. Send comments regarding this burden estimate to: Secretary, Board of Governors of the Federal Reserve System, 20th and C Streets, NW, Washington, DC 20551; and to the Office of Management and Budget, Paperwork Reduction Project, (7100-0285), Washington, DC 20503. Turnover Survey FR 3036 April 2019 Instructions A. Introduction These instructions cover the turnover part of the survey. The turnover part of the survey will be conducted on a locational basis.
    [Show full text]
  • 2016 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Market Activity Frequently Asked Questions and Answers
    Restricted 20 January 2016 2016 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Market Activity Frequently asked questions and answers Table of Contents A. Risk categories ............................................................................................................... 3 1. Foreign exchange transactions: the reporting of gold ............................................ 3 B. Instruments ..................................................................................................................... 3 1. Reporting of currency options strategies ............................................................... 3 2. Reporting of FX swaps .......................................................................................... 3 3. Categorisation of currency swaptions and interest rate swaptions ........................ 4 4. Reporting of in/out swaps between CLS members ................................................ 4 5. Reporting of “cash/same day” transactions. .......................................................... 4 C. Counterparties ................................................................................................................ 4 1. Definition of reporting dealers ................................................................................ 4 2. The lists of reporting dealers for the two parts of the survey ................................. 5 3. Counterparties in a FX prime brokerage relationship ............................................ 5 4. Treatment of centrally cleared
    [Show full text]
  • Robert Carbaugh and David Hedrick, Will the Dollar Be Dethroned As the Main Reserve Currency?
    Global Economy Journal Volume 9, Issue 3 2009 Article 1 Will the Dollar be Dethroned as the Main Reserve Currency? Robert J. Carbaugh∗ David W. Hedricky ∗Central Washington University, [email protected] yCentral Washington University, [email protected] Copyright c 2009 Berkeley Electronic Press. All rights reserved. Will the Dollar be Dethroned as the Main Reserve Currency? Robert J. Carbaugh and David W. Hedrick Abstract The U.S. dollar was in the line of fire as leaders from the largest developed and developing countries participated in the G8 meeting in July, 2009. China and other emerging market heavy- weights such as Russia and Brazil are pushing for debate on an eventual shift away from the dollar to a new global reserve currency. These countries are particularly concerned about the heavy debt burden of the United States and fear inflation will further debase the dollar which has lost 33 percent in value against other major currencies since 2002. Will the dollar continue as the main reserve currency of the world? What are the other currencies to watch as challengers to the throne? This paper addresses these questions. KEYWORDS: international policy, open economy macroeconomics Carbaugh and Hedrick: Dollar as a Reserve Currency Since the 1940s, the U.S. dollar has served as the main reserve currency of the world. Dollars are used throughout the world as a medium of exchange and unit of account, and many nations store wealth in dollar-denominated assets such as Treasury securities. The dollar’s attractiveness has been supported by a strong and sophisticated U.S. economy and its safe-haven status for international investors.
    [Show full text]
  • DEPARTMENT of the TREASURY Determination of Foreign Exchange
    This document has been submitted to the Office of the Federal Register (OFR) for publication and is pending placement on public display at the OFR and publication in the Federal Register. The document may vary slightly from the published document if minor editorial changes have been made during the OFR review process. Upon publication in the Federal Register, the regulation can be found at http://www.gpoaccess.gov/fr/, www.regulations.gov, and at www.treasury.gov. The document published in the Federal Register is the official document. DEPARTMENT OF THE TREASURY Determination of Foreign Exchange Swaps and Foreign Exchange Forwards under the Commodity Exchange Act AGENCY: Department of the Treasury, Departmental Offices. ACTION: Notice of Proposed Determination. SUMMARY: The Commodity Exchange Act (―CEA‖), as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (―Dodd-Frank Act‖), authorizes the Secretary of the Treasury (―Secretary‖) to issue a written determination exempting foreign exchange swaps, foreign exchange forwards, or both, from the definition of a ―swap‖ under the CEA. The Secretary proposes to issue a determination that would exempt both foreign exchange swaps and foreign exchange forwards from the definition of ―swap,‖ in accordance with the relevant provisions of the CEA and invites comment on the proposed determination, as well as the factors supporting such a determination. DATES: Written comments must be received on or before [INSERT DATE THAT IS 30 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER], to be assured of consideration. ADDRESSES: Submission of Comments by mail: You may submit comments to: Office of Financial Markets, Department of the Treasury, 1500 Pennsylvania Avenue N.W., Washington, DC, 20220.
    [Show full text]
  • Introduction Section 4000.1
    Introduction Section 4000.1 This section contains product profiles of finan- Each product profile contains a general cial instruments that examiners may encounter description of the product, its basic character- during the course of their review of capital- istics and features, a depiction of the market- markets and trading activities. Knowledge of place, market transparency, and the product’s specific financial instruments is essential for uses. The profiles also discuss pricing conven- examiners’ successful review of these activities. tions, hedging issues, risks, accounting, risk- These product profiles are intended as a general based capital treatments, and legal limitations. reference for examiners; they are not intended to Finally, each profile contains references for be independently comprehensive but are struc- more information. tured to give a basic overview of the instruments. Trading and Capital-Markets Activities Manual February 1998 Page 1 Federal Funds Section 4005.1 GENERAL DESCRIPTION commonly used to transfer funds between depository institutions: Federal funds (fed funds) are reserves held in a bank’s Federal Reserve Bank account. If a bank • The selling institution authorizes its district holds more fed funds than is required to cover Federal Reserve Bank to debit its reserve its Regulation D reserve requirement, those account and credit the reserve account of the excess reserves may be lent to another financial buying institution. Fedwire, the Federal institution with an account at a Federal Reserve Reserve’s electronic funds and securities trans- Bank. To the borrowing institution, these funds fer network, is used to complete the transfer are fed funds purchased. To the lending institu- with immediate settlement.
    [Show full text]
  • Exchange Rate Risk Protection: Creating a Model for a Selected Company
    UNIVERSITY OF LJUBLJANA FACULTY OF ECONOMICS MASTER’S THESIS EXCHANGE RATE RISK PROTECTION: CREATING A MODEL FOR A SELECTED COMPANY Ljubljana, February 2017 TIMO GRANDOVEC, 19522771 AUTHORSHIP STATEMENT The undersigned Timo Grandovec, a student at the University of Ljubljana, Faculty of Economics, (hereafter: FELU), author of this written final work of studies with the title Analysis Of Company X’s Currency Hedging Simulation, prepared under supervision of prof. dr. Aleš Berk Skok, DECLARE 1. this written final work of studies to be based on the results of my own research; 2. the printed form of this written final work of studies to be identical to its electronic form; 3. the text of this written final work of studies to be language-edited and technically in adherence with the FELU’s Technical Guidelines for Written Works, which means that I cited and / or quoted works and opinions of other authors in this written final work of studies in accordance with the FELU’s Technical Guidelines for Written Works; 4. to be aware of the fact that plagiarism (in written or graphical form) is a criminal offence and can be prosecuted in accordance with the Criminal Code of the Republic of Slovenia; 5. to be aware of the consequences a proven plagiarism charge based on the this written final work could have for my status at the FELU in accordance with the relevant FELU Rules; 6. to have obtained all the necessary permits to use the data and works of other authors which are (in written or graphical form) referred to in this written final work of studies and to have clearly marked them; 7.
    [Show full text]
  • Japan and Germany in International Relations, 1950-2000: Parallels and Differences
    266 THE KOREAN JOURNAL OF DEFENSE ANALYSIS Japan and Germany in International Relations, 1950-2000: Parallels and Differences Hanns W. Maul1 Japan and Germany show remarkable similarities in their post- war foreign policies. Both have relied on security guarantees by the United States, and have thus accepted dependence on others, rather than trying to assert their autonomy. The new, distinctive approach to foreign policy built around the central element of security interdependence-imposed by the US, but also accepted by the elites and the peoples of Japan and Germany-was highly successful. Now with the end of the Cold War there are question marks about whether the two countries should and could pursue their postwar policies as “civilian powers.” Those questions turn around (a) the desirability of a continuation of the “civilian power” approach by Japan and Germany, which is often perceived as “free riding,” (b) the willingness of elites and the public to stick with the postwar foreign policy consensus, and (c) the ability of the two countries to continue their distinctive foreign policy approach under new, possibly less favorable international circumstances. The author concludes that the civilian power approach basically still seems to provide the best possible course for both countries, but also that Germany and in particular Japan need to do more to keep this approach viable. HANNS W. MAULL 177 Japan and Germany in International Relations, 1950-2000: Parallels and Differences Hanns W. Maul1 Japan and Germany as “Civilian Powers”: 1950-1 990 Divided by the vast land mass of Eurasia, two countries at the periphery of this huge continent have since the last quarter of the nineteenth century had a remarkably similar history.
    [Show full text]
  • The Foreign Exchange and Interest Rate Derivatives Markets
    The Foreign Exchange and Interest Rate Derivatives Markets: Turnover in the United States, April 2016 Federal Reserve Bank of New York Turnover in the United States, April 2016 The Foreign Exchange and Interest Rate Derivatives Markets: Turnover in the United States, April 2016 Background The Federal Reserve Bank of New York together with over fifty other central banks conducted a survey of turnover in the over-the-counter (OTC) foreign exchange and interest rate derivatives markets for April 2016. This worldwide, cooperative effort is undertaken every three years and is coordinated by the Bank for International Settlements (BIS). The “triennial survey” is a comprehensive source of information on the size and structure of the OTC foreign exchange and derivatives markets. To measure the OTC markets, the dealers that make markets in foreign exchange and interest rate derivatives reported trading volumes for April 2016 to the central banks in the countries where they are located. The participants reported separately the volume of trading they conduct with each other to permit adjustments for double reporting. The central banks then compiled national aggregates from the dealers’ data and the BIS compiled global totals from the central banks’ national data.1 (See Annex I for a complete description of survey terms and methods.) In 2016, a total of twenty-three dealers in the United States participated in the foreign exchange part of the survey and nineteen in the interest rate derivatives section, slightly changed from 2013, which had twenty-four and eighteen participating institutions respectively. Participating dealers were commercial banks, U.S. offices of foreign banking organizations, and securities brokers/dealers.
    [Show full text]
  • Proposal to Change the Swap Margin Rules
    59970 Proposed Rules Federal Register Vol. 84, No. 216 Thursday, November 7, 2019 This section of the FEDERAL REGISTER swap dealers under the agencies’ Regulations.gov Classic: Go to https:// contains notices to the public of the proposed respective jurisdictions to exchange www.regulations.gov/. Enter ‘‘Docket ID issuance of rules and regulations. The margin with their counterparties for OCC–2019–0023’’ in the Search Box and purpose of these notices is to give interested swaps that are not centrally cleared click ‘‘Search.’’ Click on ‘‘Comment persons an opportunity to participate in the (Swap Margin Rule). The Swap Margin Now’’ to submit public comments. For rule making prior to the adoption of the final rules. Rule as adopted in 2015 takes effect help with submitting effective under a phased compliance schedule comments please click on ‘‘View spanning from 2016 through 2020, and Commenter’s Checklist.’’ Click on the DEPARTMENT OF THE TREASURY the dealers covered by the rule continue ‘‘Help’’ tab on the Regulations.gov home to hold swaps in their portfolios that page to get information on using Office of the Comptroller of the were entered into before the effective Regulations.gov, including instructions Currency dates of the rule. Such swaps are for submitting public comments. grandfathered from the Swap Margin Regulations.gov Beta: Go to https:// 12 CFR Part 45 Rule’s requirements until they expire beta.regulations.gov/ or click ‘‘Visit according to their terms. The proposed New Regulations.gov Site’’ from the [Docket No. OCC–2019–0023] rule would permit swaps entered into Regulations.gov classic homepage.
    [Show full text]
  • Swap” Definition Takes Effect
    October 15, 2012 CFTC Relief and Guidance as the “Swap” Definition Takes Effect CFTC Issues Interpretive and No-Action Letters, and Responds to Questions Providing Guidance as the Definition of “Swap” Takes Effect SUMMARY The Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”, collectively with the SEC, “Commissions”)1 adopted rules further defining key terms under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) including “swap dealer”, “major swap participant”, “security-based swap dealer”, “major security-based swap participant” and “eligible contract participant” (the “Entity Definitions”), and subsequently adopted rules further defining additional key terms under Title VII of Dodd-Frank (“Title VII”) including “swap”, “security-based swap” and “mixed swap” (the “Product Definitions”).2 The Product Definitions generally took effect on October 12, 2012, triggering a number of regulatory obligations under Title VII, except that for purposes of certain relief from SEC requirements, the effective date of the definition of “security-based swap” will be February 11, 2013.3 On October 10-12, the CFTC issued an unprecedented 13 interpretive and no-action letters as well as three sets of responses to questions previously submitted by industry participants. The letters and other guidance provide clarifications and relief in a number of areas, including: Clarification as to the timing of certain restrictions relating to swap customer collateral. Temporary no-action relief applicable to transactions that may be exempt under pending proposals to exempt certain transactions in electricity markets and certain transactions involving not-for-profit electric cooperatives. Interpretive relief for certain real estate investment trusts (“REITs”) and securitization vehicles from meeting the definition of “commodity pool” under Section 1a(10) of the Commodity Exchange Act (“CEA”).
    [Show full text]
  • The Impact of Public Debt on Foreign Exchange Reserves and Central Bank Profitability: the Case of Hungary
    The impact of public debt on foreign exchange reserves and central bank profitability: the case of Hungary Gergely Baksay, Ferenc Karvalits and Zsolt Kuti1 Abstract This paper focuses on the interactions between public debt policy and foreign exchange reserve management. We found that, although foreign currency debt issuance can contribute significantly to the growth of foreign exchange reserves, it can cause serious difficulties in the assessment of reserve adequacy, especially during crisis periods. Furthermore, it affects the profit-loss of the central bank. On the other hand, the accumulation of foreign exchange reserves may affect the public deficit and debt as well. Based on these observations, we draw several lessons. We conclude that debt management policy may result in a suboptimal solution on a consolidated basis if the needs of reserve adequacy are not taken into account within the decision-making process for foreign currency debt issuance. In addition, we argue that, if the central bank wants to enhance its capacity to intervene during a crisis, it should seek to identify and utilise other sources of foreign exchange liquidity. But the options here are limited: we believe that the most appropriate tool that would enable a central bank such as the MNB to rapidly obtain an ample amount of foreign exchange reserves is a foreign exchange swap line provided by a developed country central bank. Keywords: Monetary policy, fiscal policy, public debt management, national budget, sovereign debt, foreign exchange reserve JEL classification: E52, E58, E62, E63, H63 1 Gergely Baksay is Senior Analyst, Ferenc Karvalits is Deputy Governor and Zsolt Kuti is Senior Economist.
    [Show full text]