nep-cba New Economics Papers
on Central Banking
Issue of 2014‒08‒25
23 papers chosen by
Maria Semenova
Higher School of Economics

  1. New monetary policy tools: what have we learned? By Rosengren, Eric S.
  2. Monetary policy and forward guidance By Rosengren, Eric S.
  3. Simplicity and complexity in capital regulation By Rosengren, Eric S.
  4. Policymaking with a diversity of views By Rosengren, Eric S.
  5. Reserve Requirement Policy over the Business Cycle By Pablo Federico; Carlos A. Vegh; Guillermo Vuletin
  6. We Are All QE-sians Now By Takatoshi Ito
  7. How Monetary Policy is Made: Two Canadian Tales By Pierre L. Siklos, Matthias Neuenkirch
  8. How to stabilize inflation without damaging employment: Strenghtening the power of unions. By Amélie Barbier-Gauchard; Francesco De Palma; Giuseppe Diana
  9. The Mystery of the Printing Press: Self-fulfilling debt crises and monetary sovereignty By Corsetti, Giancarlo; Dedola, Luca
  10. Dealing with a liquidity trap when government debt matters: Optimal time-consistent monetary and fiscal policy By Burgert, Matthias; Schmidt , Sebastian
  11. Critical Evaluation of Basel III as Prudential Regulation and its Consequences in Developing Countries’ Credit Needs By Dawa Sherpa
  12. Determinants of the real impact of banking crises: A review and new evidence By Philip Wilms; Job Swank; Jakob de Haan
  13. A Threshold Vector Autoregression Model of Exchange Rate Pass-Through in Mexico By Abdul Aleem; Amine Lahiani
  14. Inflation Targeting: A Comparative Empirical Analysis By Pınar Kaynak
  15. Limited Deposit Insurance Coverage and Bank Competition By Shy, Oz; Stenbacka, Rune; Yankov, Vladimir
  16. The Swiss franc's honeymoon By Rahel Studer-Suter; Alexandra Janssen
  17. International Bailouts: Why Did Banks' Collective Bet Lead Europe to Rescue Greece? By E. Mengus
  18. Financial crises, debt volatility and optimal taxes By Julian A. Parra-Polania; Carmiña O. Vargas
  19. Estimating Daily Inflation Using Scanner Data: A Progress Report By Kota Watanabe; Tsutomu Watanabe
  20. Assessing Targeted Macroprudential Financial Regulation: The Case of the 2006 Commercial Real Estate Guidance for Banks By Bassett, William F.; Marsh, Blake
  21. Global Inflation Dynamics in the Post-Crisis Period: What Explains the Twin Puzzle? By Christian Friedrich
  23. Денежная политика количественного смягчения при высоких ставках центрального банка By BLINOV, Sergey

  1. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: In a speech at the Central Bank of Guatemala, Federal Reserve Bank of Boston President Eric Rosengren discussed “new” monetary policy tools (including forward guidance and large-scale asset purchases) and shared his opinion on how U.S. monetary policy could evolve.
    Date: 2014–06–09
  2. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: In a speech at Husson University in Bangor, Maine, Federal Reserve Bank of Boston President Eric Rosengren advanced his view that monetary policy should remain highly accommodative until the economy is on more solid footing. He also explored the Fed's "forward guidance" challenges, and whether certain economic behaviors will return to pre‐crisis norms.
    Date: 2014–04–15
  3. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: Eric called the increased attention on sufficient high-quality capital for banking organizations extremely important, and a "lesson learned and applied" from the financial crisis.
    Date: 2013–11–18
  4. By: Rosengren, Eric S. (Federal Reserve Bank of Boston)
    Abstract: In a forum at the American Economic Association's annual meeting in Philadelphia, Federal Reserve Bank of Boston President Eric Rosengren noted the diversity of views that flourish within the Federal Reserve. He spoke alongside fellow Reserve Bank Presidents from the New York, Minneapolis, and Philadelphia Reserve Banks, on a panel moderated by Stanley Fischer, Distinguished Fellow at the Council on Foreign Relations.
    Date: 2014–01–04
  5. By: Pablo Federico (BlackRock (; Carlos A. Vegh (Johns Hopkins University and NBER (E-mail:; Guillermo Vuletin (The Brookings Institution (
    Abstract: Based on a novel quarterly dataset for 52 countries for the period 1970-2011, we analyze the use and cyclical properties of reserve requirements (RR) as a macroeconomic stabilization tool and whether RR policy substitutes or complements monetary policy. We find that (i) around two thirds of developing countries have used RR policy as a macroeconomic stabilization tool compared to just one third of industrial countries (and no industrial country since 2004); (ii) most developing countries that rely on RR use them countercyclically; and (iii) in many developing countries, monetary policy is procyclical and hence RR policy has substituted monetary policy as a countercyclical tool. We interpret the latter finding as reflecting the need of many emerging markets to raise interest rates in bad times to defend the currency and not raise or lower the interest rate in good times to prevent further currency appreciation. Under these circumstances, RR policy provides a second instrument that substitutes for monetary policy. Evidence from expanded Taylor rules (i.e., Taylor rules that include a nominal exchange rate target) supports these mechanisms.
    Keywords: macroprudential, reserve requirement, monetary policy, exchange rate, business cycle
    JEL: E32 E50 F31 F41
    Date: 2014–08
  6. By: Takatoshi Ito (National Graduate Institute for Policy Studies, Graduate School of Public Policy, University of Tokyo, and NBER (E-mail: ))
    Abstract: The four major banks (BOJ, FRB, BOE and ECB) have adopted unconventional monetary policy, or broadly-defined quantitative easing (QE), in the last several years. The broadly-defined QE can be classified into comprehensive easing (CE) and pure-QE. The former is aimed at purchasing assets of dysfunctional markets and the latter is aimed at expanding monetary base to stimulate demands. The objective of this paper is three-fold. First, various QE adopted by four central banks are classified into CE and pure-QE. Second, the Bank of Japan (BOJ) is a harbinger for most QE measures in its earlier QE period of 2001-2006. Third, effects of BOJfs QE measures are empirically investigated with focus on the three possible transmission channels with monthly data since January 1999. The long-term interest rate tends to be lower and the yield curve tends to be flattened when the monetary base expands faster than nominal GDP. The yen vis-a-vis the US dollar tends to depreciate when the Japanese monetary base expands faster than the US monetary base. An impact of monetary base expansion on the inflation expectation is not confirmed. Findings are consistent with a view that QE is effective, by lowering the long-term interest rate and the currency depreciation.
    Keywords: Quantitative Easing, unconventional monetary policy, inflation targeting, inflation expectation, central bank balance sheet, zero interest rate policy
    JEL: E31 E43 E44 E52 E58
    Date: 2014–08
  7. By: Pierre L. Siklos, Matthias Neuenkirch (Wilfrid Laurier University)
    Abstract: This paper examines the policy rate recommendations of the Bank of Canada’s Governing Council (GC) and the C.D. Howe Institute’s (CDHI) Monetary Policy Council (MPC) since 2003. We find, first, that differences in the median recommendations between the MPC and the GC are persistent but small (i.e., 25 bps). The median MPC recommendation is based on a higher steady state real interest rate. However, the response of the MPC and the GC to output and inflation shocks are, for the most part, comparable. Second, we are also able to examine the individual recommendations for the MPC. Estimates of the determinants of consensus inside the MPC or disagreement with the GC yield some useful insights. For example, disagreements are more likely when rates are proposed to rise than at other times. Equally interesting is the finding that the Bank of Canada conditional commitment on the overnight rate in 2009-10 has a relatively larger restricting impact on the MPC’s median recommendation than the GC’s target rate.
    Keywords: Bank of Canada, central bank communication, committee behaviour, monetary policy committees, shadow councils, Taylor rules.
    JEL: E43 E52 E58 E61 E69
    Date: 2014–03–01
  8. By: Amélie Barbier-Gauchard; Francesco De Palma; Giuseppe Diana
    Abstract: The aim of this paper is to assess the impact of union bargaining power on inflation and employment in a case of efficiency bargaining, in a context of a strategic game between Central Bank and social partners.
    Keywords: monetary policy, employment, inflation, union bargaining power, efficiency bargaining.
    JEL: E24 E52 E58 J52
    Date: 2014
  9. By: Corsetti, Giancarlo; Dedola, Luca
    Abstract: Building on Calvo (1988), we develop a stochastic monetary economy in which government default may be driven by either self-fulfilling expectations or weak fundamentals, and explore conditions under which central banks can rule out the former. We analyze monetary backstops resting on the ability of the central bank to swap government debt for its monetary liabilities, whose demand is not undermined by fears of default. To be effective, announced interventions must be credible, i.e., feasible and welfare improving. Absent fundamental default risk, a monetary backstop is always effective in preventing self-fulfilling crises. In the presence of fundamental default risk and institutional constraints on the balance sheet of the central bank, a credible monetary backstop is likely to fall short of covering government's financial needs in full. It is thus effective to the extent that it increases the level of debt below which the equilibrium is unique.
    Keywords: Debt monetization; Lender of last resort; Seigniorage; Sovereign risk and default
    JEL: E58 E63 H63
    Date: 2013–02
  10. By: Burgert, Matthias; Schmidt , Sebastian
    Abstract: How does the need to preserve government debt sustainability affect the optimal monetary and fiscal policy response to a liquidity trap? To provide an answer, we employ a small stochastic New Keynesian model with a zero bound on nominal interest rates and characterize optimal time-consistent stabilization policies. We focus on two policy tools, the short-term nominal interest rate and debt-financed government spending. The optimal policy response to a liquidity trap critically depends on the prevailing debt burden. While the optimal amount of government spending is decreasing in the level of outstanding government debt, future monetary policy is becoming more accommodative, triggering a change in private sector expectations that helps to dampen the fall in output and inflation at the outset of the liquidity trap. --
    Keywords: Monetary Policy,Fiscal Policy,Deficit spending,Discretion,Zero nominal interest rate bound,New Keynesian model
    JEL: E31 E52 E62 E63 D11
    Date: 2013
  11. By: Dawa Sherpa (Centre for Economic Studies, Jawaharlal Nehru University, New Delhi, India)
    Abstract: This paper seeks to critically evaluate the nature and motivation for the regulatory frame sought in the Basel III norms and its consequences on the credit needs of developing countries. After the failure of previous two Basel accords (I and II), to act as the effective prudential regulation of large financial institutions operating on global scale, the new Basel III accord is hailed as the new regulatory rule which has successfully taken into consideration of all the lacunas of earlier accord. But structurally all Basel accords are market mediated regulation, which tries to contain systemic crisis of financial institution by imposing better liquidity and capital requirements on financial institutions. It was unable to deal with strong elements of regulatory capture, which virtually makes it ineffective. All Basel accords at best tries to stop bank insolvency issues during crisis period but it does not prevent the crisis from occurring altogether (like Glass Steagall act, at 1933 in US). Not only it is micro prudential in nature, it also ignores endogenous evolution of risk of underlying assets of financial institutions. Also non-binding character and ‘one size fit for all’ approach of the recommendation makes it very hard to implement. And for developing nations new Basel III has the potential to make flow of credit more volatile and pro-cyclical and additionally it raises the cost of financing and reduces the level of credit available for developmental purposes. It is unable to deal with the issue of regulatory arbitrage and consequent rise of shadow banking activities in developing countries which are raising serious concern of systemic risk in financial system of these countries.
    Keywords: Basel III, Macro Prudential Regulation, Shadow Banking, Structural Regulation
    JEL: G1 G2
    Date: 2013
  12. By: Philip Wilms; Job Swank; Jakob de Haan
    Abstract: We examine which variables are robust in explaining cross-country differences in the real impact of systemic banking crises. Based on a meta-analysis, we identify 21 variables frequently used as determinants of the severity of crises. Employing nine proxies for crisis severity, we find that large current account imbalances are the most robust determinant of the real impact of banking crises. Countries with a high GDP per capita have more prolonged downfalls after the occurrence of a banking crisis. Exchange rate developments and pre-crisis GDP growth are related to the peak-to-trough impact of a banking crisis.
    Keywords: banking crises; real impact of crises; duration of crises
    JEL: F3 G01 G18
    Date: 2014–08
  13. By: Abdul Aleem (Department of Mathematics and Statistics [Canada] - Dalhousie University, CEPN - Centre d'Economie Université Paris Nord - UFR de Sciences Economiques Paris XIII); Amine Lahiani (ESC Rennes School of Business - ESC Rennes School of Business, LEO - Laboratoire d'économie d'Orleans - CNRS : UMR7322 - Université d'Orléans)
    Abstract: Considering nonlinearities in the exchange rate pass-through to domesticprices, this paper estimates exchange rate pass-through in Mexico. We examine responses of domestic prices to a positive one unit exchange rate shock by estimating a threshold vector autoregression (TVAR) model. A monthly rate of inflation of 0.79% acts as a threshold. The exchange rate pass-through to domestic prices is statistically significant above the threshold level of the inflation rate and statistically insignificant below it.
    Keywords: Exchange rate pass-through ; Prices ; Threshold vector autoregression
    Date: 2014
  14. By: Pınar Kaynak (TOBB ETU, Center for Social Policy Research, Turkey)
    Abstract: The purpose of this paper is to make a comparison between how countries with inflation targeting (IT) fared compared to their non-IT peers in general during the period of 2003 and 2011, which is based on Kaynak (2012). The dataset, which is used in the analysis, has been provided through the database of International Financial Statistics (IFS) from the International Monetary Fund (IMF). First to detect the existing correlation between IT and economic performance outcomes Ordinary Least Squares (OLS) regression has been used. Second, to filter out business cycle fluctuations, Generalized Method of Moments (GMM) dynamic panel data estimator has been used. The results presented here is not necessarily at odds with the prescriptions of the standard IT literature. Despite the evidence demonstrates that IT countries have a better economic performance in general and in the global financial crisis in particular, it does not establish a causality relationship.
    Keywords: Inflation Targeting, Generalized Method of Moments, Causality
    JEL: C51 E52 E58
    Date: 2013
  15. By: Shy, Oz (Federal Reserve Bank of Boston); Stenbacka, Rune (Hanken School of Economics); Yankov, Vladimir (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Deposit insurance schemes in many countries place a limit on the coverage of deposits in each bank. However, no limits are placed on the number of accounts held with different banks. Therefore, under limited deposit insurance, some consumers open accounts with different banks to achieve higher or full deposit insurance coverage. We compare three regimes of deposit insurance: No deposit insurance, unlimited deposit insurance, and limited deposit insurance. We show that limited deposit insurance weakens competition among banks and reduces total welfare relative to no or unlimited deposit insurance.
    Keywords: Limited deposit insurance coverage; deposit rates; bank competition
    JEL: G21
    Date: 2014–08–06
  16. By: Rahel Studer-Suter; Alexandra Janssen
    Abstract: To counter the sharp appreciation of the Swiss franc that set in in the wake of the European sovereign debt crisis, on September 6, 2011, the Swiss National Bank announced to enforce a minimum EUR/CHF exchange rate of CHF 1.20. We find that the simple, though elegant model for the exchange rate within a target zone proposed by Krugman (1991) describes the behavior of the Swiss franc since the inception of this lower bound. Being a prime example of a safe haven currency, the Swiss franc systematically appreciates when global market conditions tighten. But as Krugman's model predicts, the sensitivity of the Swiss franc exchange rate to state variables that indicate such risky times declines as it approaches its lower bound. In particular, the Swiss franc is well described as an S-shaped function of the option prices implied probability for EUR/CHF exchange rate realizations below the lower bound. This state variable not only indicates times of increased global risk, but also quantifies appreciation pressure on the Swiss currency at the lower bound. We conclude that the Swiss franc lower bound helps stabilizing the value of the Swiss currency.
    Keywords: Exchange rate target zone, safe haven currency, volatility smile
    JEL: E52 E58 F31 G01
    Date: 2014–08
  17. By: E. Mengus
    Abstract: In this paper, I use a two-country model to investigate the incentives which lead one country to take charge of another country's debt. I show that, when direct transfers to residents cannot be perfectly targeted, the first country can be better o_ honoring the second country's liabilities, even if this means paying o_ foreign creditors. Anticipating the ex post rescue, private agents engage in a collective bet on the foreign country's debt, leading to the emergence of a self-fulfilling implicit guarantees in equilibrium. In response to the resulting inefficient outcome, the optimal policy for the rescuing country's government is to restrict domestic exposures to foreign debt ex ante, for example, through a tax on capital outflows. Finally, I argue that these findings can shed light on the European sovereign debt crisis, the interventions of the IMF, the 1790 US federal bailout of states and on the 2008 US financial crisis.
    Keywords: Implicit guarantees, bailouts, capital flows, capital controls.
    JEL: F33 F34 F36 F42
    Date: 2014
  18. By: Julian A. Parra-Polania; Carmiña O. Vargas
    Abstract: We study financial crises in a model of a small open production economy subject to a credit constraint and to uncertainty on the real value of debt repayments. We find that, unlike most of the previous literature, the decentralized equilibrium exhibits underborrowing. The future possibility of reducing the severity of crises gives the incentives to the central planner (CP) to increase both current debt and the crisis probability. We also find that the CP equilibrium can be implemented by means of a tax on debt (a macro-prudential policy) and, only during crises, subsidies on consumption and a tax on non-tradable labor. The welfare gain of moving to the CP equilibrium is small for the baseline scenario but very sensitive to changes in debt volatility and the degree of openness of the economy. Classification JEL: F34, F41, H21.
    Date: 2014–08
  19. By: Kota Watanabe (Chuo University and University of Tokyo); Tsutomu Watanabe (University of Tokyo)
    Abstract: We construct a T¨ornqvist daily price index using Japanese point of sale (POS) scanner data spanning from 1988 to 2013. We find the following. First, the POS based inflation rate tends to be about 0.5 percentage points lower than the CPI inflation rate, although the difference between the two varies over time. Second, the difference between the two measures is greatest from 1992 to 1994, when, following the burst of bubble economy in 1991, the POS inflation rate drops rapidly and turns negative in June 1992, while the CPI inflation rate remains positive until summer 1994. Third, the standard deviation of daily POS inflation is 1.1 percent compared to a standard deviation for the monthly change in the CPI of 0.2 percent, indicating that daily POS inflation is much more volatile, mainly due to frequent switching between regular and sale prices. We show that the volatility in daily inflation can be reduced by more than 2daily inflation rate 0 percent by trimming the tails of product-level price change distributions. Finally, if we measure price changes from one day to the next and construct a chained T¨ornqvist index, a strong chain drift arises so that the chained price index falls to 10-10 of the base value over the 25-year sample period, which is equivalent to an annual deflation rate of 60 percent. We provide evidence suggesting that one source of the chain drift is fluctuations in sales quantity before, during, and after a sale period.
    Keywords: scanner data; consumer price index; T¨ornqvist index; chain drift; trimmed means; regular and sale prices; deflation
    JEL: E31 C43
    Date: 2014–02
  20. By: Bassett, William F. (Board of Governors of the Federal Reserve System (U.S.)); Marsh, Blake (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: In the mid-2000s, federal bank regulatory agencies became alarmed by steadily increasing concentrations of commercial real estate (CRE) loans at many banks, particularly loans used to finance construction and land development (CLD). In January 2006, they issued guidance that required banks with specific high concentrations in those asset classes to tighten managerial controls. This paper shows that banks with concentrations in excess of the thresholds set in the guidance subsequently experienced slower growth in their CRE and CLD portfolios than can be explained by changes in the health of their balance sheets and economic conditions. Moreover, banks that were above the CRE thresholds also tended to have slower growth in C&I loans but faster growth in loans to households after the guidance was issued. The results highlight the potential for this type of macroprudential regulation to have a significant and broad influence on bank behavior.
    Keywords: Credit channel; government regulation; bank lending; real estate
    JEL: E44 G21 G28
    Date: 2014–06–12
  21. By: Christian Friedrich
    Abstract: Inflation dynamics in advanced countries have produced two consecutive puzzles during the years after the global financial crisis. The first puzzle emerged when inflation rates over the period 2009-11 were consistently higher than expected, although economic slack in advanced countries reached its highest level in recent history. The second puzzle - still present today - was initially observed in 2012, when inflation rates in advanced countries were weakening rapidly despite the ongoing economic recovery. This paper specifies a global Phillips curve for headline inflation using inflation expectations by professional forecasters and a measure of economic slack at the global level over the period 1995q1-2013q3. Phillips curve data points in the period after the global financial crisis show a significantly different but consistent pattern compared to data points in the period before or during the crisis. In the next step, potential explanatory variables at the global level are assessed regarding their ability to improve the in-sample fit of the global Phillips curve. The analysis yields three main findings. First, the standard determinants can still explain a sizable share of global inflation dynamics. Second, household inflation expectations are an important addition to the global Phillips curve. And third, the fiscal policy stance helps explain global inflation dynamics. When taking all three findings into account, it is possible to closely replicate global inflation dynamics over the post-crisis period.
    Keywords: Fiscal Policy, Inflation and prices, International topics
    JEL: E E3 E31 E5 F F4 F41
    Date: 2014
  22. By: Borut Strazisar (ERUDIO, European institute for entrepreneurial research, Ljubljana)
    Abstract: Market in financial instruments directive tried to suppress the rigidity of EU legislative procedure with introduction of principle based legislation. At that time this approach was seen as something new and fresh. Big financial crisis in 2008 showed that adopted solution didn’t fulfil the expectations. Submission is divided in three parts. First part deals with background and logic of self-regulation. Self-regulation is placed in the system of regulation, deregulation and reregulation. It analyses why self-regulation becomes so popular. This part presents different types of self-regulation with their typical features. Second part deals with the problems and weaknesses. Self-regulation posts numerous questions. Fundamental question is whether self-regulation could be the effective change for state legislation. Second problem of self-regulation is the jurisdiction in re. Third problem is the openness of self-regulatory rules – they could be interpreted in different ways in similar situations. The end result is unequal legal treatment. Other end result is even scarier – interpretation is used to protect certain parties and so provoking the harm to society (like in case of Enron or latest financial crisis). And least but not last, self-regulation could end in overregulation, which side effect is that no one knows the law. We could speak about legal jungle. Third part of submission deal with prepositions, which should be fulfilled for working self-regulation. Basic question is, if self-regulation is appropriate for all the societies and all fields of economic activity. To answer that question, we must look at different points. So there is a question which harm could be done, if something goes wrong. Then there is a question if providers and consumers are developed enough not to abuse their rights and obligations. This part tries to establish certain mechanisms to make self-regulation workable and to avoid negative side-effects of self-regulation.
    Keywords: financial instruments, financial markets, regulation
    JEL: G28 K22 K23 K42
    Date: 2013
  23. By: BLINOV, Sergey
    Abstract: This paper investigates the possibility of conducting an unconventional monetary policy of Quantitative easing (QE) at high interest rates using the example and experience of Russia. The Central Bank of the Russian Federation has raised the key interest rate on three occasions during the 7 months of 2014. The Central Bank has been coming in for criticism for such an increase. However, this criticism is unfair, as sometimes interest rate reduction or failure to raise interest rate result in adverse consequences. Luckily, interest rate is not the only and often far from being the most efficient tool of successful monetary policy. During the hardest phase of the most recent crisis, the central banks worldwide, for example, U.S. Federal Reserve System, resorted to another tool, i.e. Quantitative easing (QE), rather interest rates (which, by that time, had been virtually dropped down to zero). Some experts recognize those to be an important innovation devised by Ben Bernanke, Head of the U.S. Fed during 2006 - 2014. The Central Bank of Russia now has an opportunity of employing a still more innovative policy, i.e. to have “quantitative easing” at high interest rates rather than at zero rates. The experience of the «Golden Decade» (the decade of robust economic growth in Russia between September 1998 and September 2008) proves the efficiency of such monetary policy. The criterion for «sufficiency» of quantitative easing must be the growth rate of the real money supply. In June 2014, the real money supply decreased. That has happened for the first time since December 2009. It shows that there is a need for urgent action on the part of the Central Bank. To bring about steady economic growth, it is required that such quantitative easing be put in place as would make real money supply grow at a pace no slower than the target growth rate for GDP. According to preliminary estimate, the volume of necessary easing would be in the range between RUR 0.5 and 1.7 trillion. Such a program may make itself felt as soon as 3-4 months after its launch.
    Keywords: денежно-кредитная политика; политика центральных банков; количественное смягчение; процентные ставки; экономический рост; денежная масса
    JEL: E31 E32 E40 E43 E50 E51 E52 E58 E65 G01 N10 O11
    Date: 2014–08–18

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