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102. Crisis and Calm: Demand for U.S. Currency at Home and Abroad From the Fall of the Berlin Wall to 2011
- Author:
- Ruth Judson
- Publication Date:
- 11-2013
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- U.S. currency has long been a desirable store of value and medium of exchange in times and places where local currency or bank deposits are inferior in one or more respects. Indeed, as noted in earlier work, a substantial share of U.S. currency circulates outside the United States. Although precise measurements of stocks and flows of U.S. currency outside the United States are not available, a variety of data sources and methods have been developed to provide estimates. This paper reviews the raw data available for measuring international banknote flows and presents updates on indirect methods of estimating the stock of currency held abroad: the seasonal method and the biometric method. These methods require some adjustments, but they continue to indicate that a large share of U.S. currency is held abroad, especially in the $100 denomination. In addition to these existing indirect methods, I develop a framework and basic variants of a new method to estimate the share of U.S. currency held abroad. Although the methods and estimates are disparate, they provide support for several hypotheses regarding cross-border dollar stocks and flows. First, once a country or region begins using dollars, subsequent crises result in additional inflows: the dominant sources of international demand over the past decade and a half are the countries and regions that were known to be heavy dollar users in the early to mid-1990s. Second, economic stabilization and modernization appear to result in reversal of these inflows. Specifically, demand for U.S. currency was extremely strong through the 1990s, a period of turmoil for the former Soviet Union and for Argentina, two of the largest overseas users of U.S. currency. Demand eased in the early 2000s as conditions gradually stabilized and as financial institutions developed. However, this trend reversed sharply with the onset of the financial crisis in late 2008 and has continued since then.
- Topic:
- International Trade and Finance, Currency, Banking, and Economic Stability
- Political Geography:
- North America and United States of America
103. Local Currency Sovereign Risk
- Author:
- Wenxin Du and Jesse Schreger
- Publication Date:
- 12-2013
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- Do governments default on debt denominated in their own currency? We introduce a new measure of sovereign credit risk, the local currency credit spread, defined as the spread of local currency bonds over the synthetic local currency risk-free rate constructed using cross currency swaps. We find that local currency credit spreads are positive and sizable. Compared with credit spreads on foreign currency denominated debt, local currency credit spreads have lower means, lower cross-country correlations, and are less sensitive to global risk factors. Global risk aversion and liquidity factors can explain more time variation in these credit spread differentials than macroeconomic fundamentals.
- Topic:
- Debt, Sovereignty, Currency, and Credit
- Political Geography:
- Global Focus
104. The Dollar’s Influence in East Asia: Benevolent or Overbearing? A Comparative Answer in the U.S. Economic Aid and the Dollar Standard
- Author:
- Gloria Koo
- Publication Date:
- 04-2012
- Content Type:
- Journal Article
- Journal:
- Joint U.S.-Korea Academic Studies
- Institution:
- Korea Economic Institute of America (KEI)
- Abstract:
- There is no doubt that the United States has been a dominant economic power in the world. U.S. troops are deployed in the various corners of the world, and their military presence is often a strong force in propping up the status quo or a peaceful co-existence, possibly and hopefully more peaceful than otherwise. The U.S. has held an important role in the international system as a military power. But also in an economic sense, the U.S. has been a dominant leader. As a major consumer market and an investor, U.S. influence on the global economy is significant to say the least. This is especially true in East Asia. Through military alliance and economic aid, the U.S. crafted close relationships with East Asian countries and influenced their domestic policymaking. For example, as a provider of military and economic stability, the U.S. wielded much influence on domestic macroeconomic policies of Korea and Taiwan during the early industrialization years of 1950s-60s. The economic aid came with conditions, and Korea and Taiwan complied. Although explicit economic aid stopped in the late 1960s, other forms of assistance, for example loans, grants and technology transfers continued, and more importantly security alliances remained strong. The U.S. still holds much influence over Korea and Taiwan, as a military ally and a major trade partner. In the present day, Korea and Taiwan closely peg their currencies to the U.S. dollar and hold large currency reserves in dollars. As a result, macroeconomic stability of Korea and Taiwan depends largely on the stability of the dollar. In this way, the dollar’s influence on Korea and Taiwan is quite significant. Similar to but also different from the way that Korea and Taiwan depended on U.S. economic aid, they again depend on the dollar to anchor economic stability.
- Topic:
- International Relations, Economics, Investment, Currency, and Economic Stability
- Political Geography:
- Taiwan, Asia, South Korea, and United States of America
105. Variance Risk Premiums and the Forward Premium Puzzle
- Author:
- Juan M. Londono and Hao Zhou
- Publication Date:
- 12-2012
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- This paper presents evidence that the foreign exchange appreciation is predictable by the currency variance risk premium at a medium 6-month horizon and by the stock variance risk premium at a short 1-month horizon. Although currency variance risk premiums are highly correlated with each other over longer horizons, their correlations with stock variance risk premiums are quite low. Interestingly the currency variance risk premium has no predictive power for stock returns. We rationalize these findings in a consumption-based asset pricing model with orthogonal local and global economic uncertainties. In our model the market is incomplete in the sense that the global uncertainty is not priced by local stock markets and is therefore a forex-specific phenomenon—the currency uncertainty’s effects on the expected stock return are off-setting between the cash flow channel and the volatility channel.
- Topic:
- Economics, Risk, Currency, and Stock Markets
- Political Geography:
- Global Focus
106. Inflation Rather Than Austerity - Hungary's Economic Strategy
- Author:
- Peter Mihalyi
- Publication Date:
- 02-2011
- Content Type:
- Working Paper
- Institution:
- Center for Social and Economic Research - CASE
- Abstract:
- "Since 1968, subsequent Hungarian governments have been less resilient to moderate inflation than others in the region. After the 1989-1990 market transition, inflation targeting became an even more important short-term policy tool. Since hyper-inflation was not allowed to gain momentum, there was no need to resort to fully-fledged currency reform. Instead, Hungarian governments have been ready to accept extra-inflation as an unavoidable price for reducing the fiscal deficit, choosing against Maastricht inflation targeting and economic coordination with Brussels."
- Topic:
- Reform, Macroeconomics, and Currency
- Political Geography:
- Europe and Hungary
107. Currency Reforms in Zimbabwe: an Analysis of Possible Currency Regimes
- Author:
- George Kararach, Phineas Kadenge, and Gibson Guvheya
- Publication Date:
- 01-2010
- Content Type:
- Working Paper
- Institution:
- The African Capacity Building Foundation (ACBF)
- Abstract:
- The Government of Zimbabwe (GoZ) adopted a multiple currencies regime (MCR) in February 2009 and demonetized the Zimbabwean dollar in July 2009 after almost a decade of economic crisis. The MCR strategy resulted in stabilizing the Zimbabwean economy; however, there are remaining concerns that need to be addressed. The purpose of this paper is to explore various options of currency regimes that could be adopted in the short and medium term in order to consolidate Economic stabilization and recovery in Zimbabwe. The paper proposes that the optimal choice of a particular currency regime be based on a framework that takes into account the following: (a) the advantages and disadvantages of a particular regime, (b) the need for correct timing and sequencing of policy tools and reform actions, (c) the prior capacity conditions in the country, and (d) the political commitment to undertake the necessary reforms. It is imperative to note that these reforms are no quick fixes for designing economic stabilization and recovery programs needed in Zimbabwe. The Zimbabwean authorities and stakeholders need to fulfill the aforesaid preconditions for successful currency reform, before collectively selecting from among the various options.
- Topic:
- Monetary Policy, Reform, Central Bank, Fiscal Policy, Currency, and Safety Net
- Political Geography:
- Africa and Zimbabwe
108. Will the U.S. Dollar Remain the Global Reserve Currency?
- Author:
- Marek Dabrowski
- Publication Date:
- 10-2010
- Content Type:
- Working Paper
- Institution:
- Center for Social and Economic Research - CASE
- Abstract:
- The U.S. economy’s rapidly growing trade and current account deficits (2003-2007) and systematic weakening of the dollar against the Euro and other currencies raised several concerns about its future as the global reserve currency. The global financial crisis of 2007-2009, while reinforcing the U.S. dollar’s role as the most liquid and in demand currency (especially during periods of increased risk aversion) triggered a political debate on how the future global reserve currency system should be shaped.
- Topic:
- Finance, Economy, Currency, Dollar, and Euro
- Political Geography:
- Global Focus and United States of America
109. Limits of Quantitative Easing
- Author:
- Marek Dabrowski
- Publication Date:
- 11-2010
- Content Type:
- Working Paper
- Institution:
- Center for Social and Economic Research - CASE
- Abstract:
- "The recent decision of the U.S. Federal Reserve Board (Fed) to increase its assets by purchasing $600 billion worth of Treasury bonds is unlikely to boost economic growth or employment prospects in the U.S. Instead, it will cause damage to the world economy and may even lead to another financial crisis (especially in emerging and developing markets), where the U.S. dollar remains a leading reserve and transaction currency."
- Topic:
- Financial Crisis, Economy, Macroeconomics, and Currency
- Political Geography:
- Global Focus and United States of America
110. Currency Crashes in Industrial Countries: Much Ado About Nothing?
- Author:
- Joseph Gagnon
- Publication Date:
- 02-2009
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- Sharp exchange rate depreciations, or currency crashes, are associated with poor economic outcomes in industrial countries only when they are caused by inflationary macroeconomic policies. Moreover, the poor outcomes are attributable to inflationary policies in general and not the currency crashes in particular. On the other hand, crashes caused by rising unemployment or external deficits have always had good economic consequences with stable or falling inflation rates.
- Topic:
- Economics, Exchange Rate Policy, Inflation, and Currency
- Political Geography:
- Global Focus