nep-cba New Economics Papers
on Central Banking
Issue of 2015‒03‒13
twenty-one papers chosen by
Maria Semenova
Higher School of Economics

  1. Spillover of the ECB's Monetary Policy Outside the Euro Area: How Different is Conventional From Unconventional Policy? By Oxana Babecka Kucharcukova; Peter Claeys; Borek Vasicek
  2. Adverse Effects of Monetary Policy Signalling By Jan Filacek; Jakub Mateju
  3. Why do we need both liquidity regulations and a lender of last resort? A perspective from Federal Reserve lending during the 2007-09 US financial crisis By Mark Carlson; Burcu Duygan-Bump; William Nelson
  4. Monetary Policy and the Financial Sector By Singh, Aarti; Stone, Sophie; Suda, Jacek
  5. Implementing Basel III through the Capital Requirements Directive (CRD) IV: leverage ratios and capital adequacy requirements By Ojo, Marianne
  6. The Conduct of Monetary Policy in the Future: Instrument Use By Kei-Ichiro Inaba; Rory O’Farrell; Łukasz Rawdanowicz; Ane Kathrine Christensen
  7. A DSGE Model for China’s Monetary and Macroprudential Policies By Sinclair, Peter; Sun, Lixn
  8. Leaning Against the Credit Cycle By Paolo Gelain; Kevin J. Lansing; Gisle J. Natvik
  9. Monetary policy implications for an oil-exporting economy of lower long-run international oil prices By Franz Hamann; Jesús Bejarano; Diego Rodríguez
  10. International Debt Deleveraging By Fornaro, Luca
  11. Quantitative easing with bite: a proposal for conditional overt monetary financing of public investment By Andrew Watt
  12. The Effects of Conventional and Unconventional Monetary Policy Surprises on Asset Markets in the United States By Unalmis, Deren; Unalmis, Ibrahim
  13. Stress tests and information disclosure By Goldstein, Itay; Leitner, Yaron
  14. The Law and Economics of Twin Peaks Financial Regulation in Hong Kong By Michael, Bryane
  15. Cross-border resolution of global banks By Faia, Ester; Weder di Mauro, Beatrice
  16. Deflation/Inflation Dynamics: Analysis based on micro prices By YOSHIKAWA Hiroshi; AOYAMA Hideaki; IYETOMI Hiroshi; FUJIWARA Yoshi
  17. Market reactions to the ECB's Comprehensive Assessment By Cenkhan Sahin; Jakob de Haan
  19. European Economic and Monetary Union Sovereign Debt Markets By Ahmet Sensoy; Ahmed Rostom; Erk Hacihasanoglu
  20. Sovereign Default Risk and State-Owned Bank Fragility in Emerging Markets By Deev, Oleg; Hodula, Martin
  21. Measuring the Core Inflation in Turkey with the SM-AR Model By Kulaksizoglu, Tamer

  1. By: Oxana Babecka Kucharcukova; Peter Claeys; Borek Vasicek
    Abstract: This paper studies the macroeconomic impact of ECB policy on the euro area and six non-EMU countries. The analysis is based on the evolution of a synthetic index of overall euro area monetary conditions (MCI) that can be decomposed into conventional and unconventional policy measures. A standard monetary VAR including the MCI subcomponents shows that the transmission of unconventional monetary policy in the euro area is quite different than under conventional policy: prices react quickly, but the response of output (industrial production) is muted. A block-restricted VAR analysis confirms that euro area monetary policy spills over to the macroeconomic developments of non-EMU countries. While conventional monetary policy has a generalised effect on economic activity, exchange rates and prices, unconventional measures have generated a variety of responses. Exchange rates respond rather quickly, but an effect on the real economy is found only for some countries, and inflation remains largely unaffected.
    Keywords: ECB, monetary policy, synthetic indicator, unconventional measures, VAR
    JEL: E58 F42
    Date: 2014–12
  2. By: Jan Filacek; Jakub Mateju
    Abstract: Assuming information asymmetry between private agents and the central bank about the state of the economy, an unexpected change in interest rates signals the central bank's perceived state of the economy and facilitates an update of private expectations in an adverse, perhaps unintended way. This "updating channel" might counteract the standard transmission from interest rates to inflation and output. We develop a simple model laying down a theoretical basis for the adverse effects of monetary policy signalling. We also detect the presence of the updating channel in private forecasts of inflation in a cross-country sample of selected OECD countries.
    Keywords: Asymmetric information, monetary policy, monetary transmission, signalling, updating channel
    JEL: E17 E43 E58
    Date: 2014–12
  3. By: Mark Carlson; Burcu Duygan-Bump; William Nelson
    Abstract: During the 2007-09 financial crisis, there were severe reductions in the liquidity of financial markets, runs on the shadow banking system, and destabilizing defaults and near-defaults of major financial institutions. In response, the Federal Reserve, in its role as lender of last resort (LOLR), injected extraordinary amounts of liquidity. In the aftermath, lawmakers and regulators have taken steps to reduce the likelihood that such lending would be required in the future, including the introduction of liquidity regulations. These changes were motivated in part by the argument that central bank lending entails extremely high costs and should be made unnecessary by liquidity regulations. By contrast, some have argued that the loss of liquidity was the result of market failures, and that central banks can solve such failures by lending, making liquidity regulations unnecessary. In this paper, we argue that LOLR lending and liquidity regulations are complementary tools. Liquidity shortfalls can arise for two very different reasons: First, sound institutions can face runs or a deterioration in the liquidity of markets they depend on for funding. Second, solvency concerns can cause creditors to pull away from troubled institutions. Using examples from the recent crisis, we argue that central bank lending is the best response in the former situation, while orderly resolution (by the institution as it gets through the problem on its own or via a controlled failure) is the best response in the second situation. We also contend that liquidity regulations are a necessary tool in both situations: They help ensure that the authorities will have time to assess the nature of the shortfall and arrange the appropriate response, and they provide an incentive for banks to internalize the externalities associated with any liquidity risks.
    Keywords: Lender of last resort, central banks, liquidity regulation, financial crises
    Date: 2015–03
  4. By: Singh, Aarti; Stone, Sophie; Suda, Jacek
    Abstract: In this paper we study whether central banks should react to financial sector variables in their policy rules. We find that responding to asset prices has no impact and does not increase the likelihood of equilibrium indeterminacy. However, a response to entrepreneurial net worth increases the likelihood of determinacy in current and forward-looking policy rules.
    Keywords: Monetary policy, determinacy, financial sector, asset prices
    Date: 2015–02
  5. By: Ojo, Marianne
    Abstract: The Capital Requirements Directive (CRD) IV, which constitutes the Capital Requirements Regulation (CRR), as well as the Capital Requirements Directive (CRD), is aimed at implementing Basel III in the European Union. Consequently, this CRD package, replaces Directives 2006/48 and 2006/49 with a Regulation and a Directive. The significance of such a move not only highlights the awareness of the importance of ensuring that Basel rules and regulations become more binding and enforceable, but also signals an era whereby the use of enforcement and supervisory tools such as Binding Technical Standards (BTS) are being introduced and generated by the European Banking Authority, as its plays a crucial role in the implementation of Basel III in the EU. Another significance of such a move towards Basel rules and regulations becoming more enforceable and binding lies in the facilitation of greater consistency, convergence and compliance, which the introduction of a Regulation, Binding Technical Standards, as well as other reporting requirements and provisions would generate in the implementation process. The increased relevance of Basel rules, and particularly Basel III rules, as well as their significance for the Eurozone, European Union institutions and European banks is hereby emphasised. This paper is also aimed at providing an analysis of the recent updates which have taken place in respect of the Basel III Leverage Ratio and the Basel III Supplementary Leverage Ratio – both in respect of recent amendments introduced by the Basel Committee and proposals introduced in the United States. As well as highlighting and addressing gaps which exist in the literature relating to liquidity risks, corporate governance and information asymmetries, by way of reference to pre-dominant based dispersed ownership systems and structures, as well as concentrated ownership systems and structures, this paper will also consider the consequences – as well as the impact - which Basel III, and in particular, the recent Basel Leverage ratios could have on the Eurozone, and European financial institutions. From this perspective, the rise of macro economics, micro economic inefficiency debates - as well as the validity of such debates will be considered.
    Keywords: Basel III; Capital Requirements Directive IV; European Banking Authority; enforcement; supervision; Binding Technical Standards; Keynesian revolution; macroeconomics; micro economic inefficiency
    JEL: D8 E3 E6 G2 G3 K2 M4
    Date: 2015–03–06
  6. By: Kei-Ichiro Inaba; Rory O’Farrell; Łukasz Rawdanowicz; Ane Kathrine Christensen
    Abstract: The set of monetary policy instruments has expanded since the start of the global financial crisis in the many OECD economies. Against this background, this paper analyses whether some of the new instruments should be retained in the long term when broader financial stability objectives are likely to feature more prominently as monetary policy goals than prior to the crisis. It also assesses if these new instruments should be used during the transition to this situation and when countries are stuck in persistent stagnation. In the post recovery situation, central banks could ultimately revert to targeting short-term market rates with small balance sheets. This might, however, require changes to monetary policy implementation due to new liquidity requirements. The transition to this situation will be lengthy and will require a mixture of liquidity draining instruments. Alternatively, they could adopt a floor system, which may benefit financial stability. The use of unconventional measures as a substitute for policy rate cuts will no longer be needed unless countries remain in persistent stagnation. Nevertheless, in the post-recovery normal, extended collateral and counterparty eligibility could be sustained, and currency swap lines among central banks could be expanded.<P>La conduite de la politique monétaire à l'avenir : L'utilisation d'instruments<BR>Dans de nombreux pays de l’OCDE, la palette des instruments de la politique monétaire s’est élargie depuis le début de la crise financière mondiale. Dans ce contexte, on s’efforce dans le présent document d’analyser s’il conviendrait de conserver certains de ces nouveaux instruments dans la durée, lorsque les objectifs de stabilité financière au sens large s’affirmeront probablement davantage en tant qu’objectifs de la politique monétaires qu’avant la crise. Il s’agit également d’évaluer si ces nouveaux instruments doivent être utilisés pendant la période de transition, et lorsque les pays sont enlisés dans une stagnation persistante. Après la reprise, les banques centrales pourraient revenir au ciblage des taux de marché à court terme avec des bilans d’ampleur modeste. Ceci pourrait toutefois obliger à modifier la mise en oeuvre de la politique monétaire, du fait des nouvelles exigences en matière de liquidité. La phase de transition vers une telle situation sera longue et nécessitera une panoplie d’instruments permettant de drainer des liquidités. Autrement, les banques centrales pourraient adopter un système de plancher, qui pourrait être bénéfique à la stabilité financière. Le recours à des mesures non conventionnelles pour suppléer des baisses des taux directeurs ne sera plus nécessaire, sauf si les pays se retrouvent dans une situation de stagnation persistante. Néanmoins, dans une situation normale d’après reprise, une extension des conditions d’admissibilité des garanties et des contreparties pourrait être maintenue, et les lignes de crédit réciproques entre banques centrales pourraient être élargies.
    Keywords: liquidity, corridor and floor interest rate systems, forward guidance, quantitative easing, conventional and unconventional monetary policy, liquidité, assouplissement quantitatif, systèmes de corridors de taux d’intérêt et de taux d’intérêt plancher, Politique monétaire conventionnelle et non conventionnelle, indications prospectives
    JEL: E42 E43 E52 F33
    Date: 2015–03–05
  7. By: Sinclair, Peter; Sun, Lixn
    Abstract: This paper develops a calibrated DSGE model for simulating China’s monetary policy and macroprudential policy. The empirical results show, first, that the interest rate is a better instrument for China’s monetary policy than the required reserve ratio when the central bank is solely concerned by the price stability; second, that the loan-to-value (LTV) ratio is a very useful macroprudential tool for China’s financial stability, and the required reserve ratio could be used as an instrument for both objectives. Whether macroprudential policy complements or conflicts with monetary policy depends upon the instruments choices of two policies. Our policy experiments suggest three combination choices of instruments for China’s monetary and macroprudential policies.
    Keywords: DSGE Model, Monetary Policy, Macroprudental Policy, China’s Economy
    JEL: E5 E6 G1
    Date: 2014–05
  8. By: Paolo Gelain (Norges Bank (Central Bank of Norway)); Kevin J. Lansing (Federal Reserve Bank of San Francisco); Gisle J. Natvik (Norges Bank (Central Bank of Norway) and Department of Economics, BI Norwegian Business School)
    Abstract: We study the interaction between monetary policy and household debt dynamics. To this end, we develop a dynamic stochastic general equilibrium model where household debt is amortized gradually, and only new loans are constrained by the current value of collateral. Long-term debt implies that swings in leverage do not simply reect shifts in borrowing, and brings model implied debt dynamics closer to their empirical counterparts. The model implies that contractive monetary policy has muted inuence on household debt, increasing debt-to-GDP in the short run, while reducing it only in the medium run. If the interest rate is systematically raised whenever the debt-to-GDP ratio or the real debt level is high, equilibrium indeterminacy and greater volatility of debt itself follows. Responding to debt growth does not cast this destabilizing influence.
    Keywords: Monetary policy, Credit, Long-term debt.
    JEL: E52 E32 E44
    Date: 2015–02–27
  9. By: Franz Hamann; Jesús Bejarano; Diego Rodríguez
    Abstract: The sudden collapse of oil prices poses a challenge to inflation targeting central banks in oil exporting economies. This paper illustrates that challenge and conducts a quantitative assessment of the impact of permanent changes in oil prices in a small and open economy, in which oil represents an important fraction of its exports. We calibrate and estimate a variety of real and monetary dynamic stochastic general equilibrium models using Colombian historical data. We find that, in these artificial economies the macroeconomic effects can be large but vary depending on the structure of the economy. The main channels through which the shock passes to the economy come from the increased country risk premium, the real exchange rate depreciation, the sectoral reallocation of resources from nontradables to tradables and the sluggish adjustment of prices. Contrary to the conventional findings in the literature of the financial accelerator mechanism for single-good closed economies, in multiple-goods small open economies the financial accelerator does not play a significant role in magnifying macroeconomic fluctuations. The sectoral reallocation from nontradable to tradables diminishes the financial amplification mechanism.
    Keywords: oil prices, precautionary savings, monetary policy, credit, leverage, financial accelerator, Colombia
    JEL: C61 E31 E37 E52 F41
    Date: 2015–03–06
  10. By: Fornaro, Luca
    Abstract: This paper provides a framework to understand debt deleveraging in a group of financially integrated countries. During an episode of international deleveraging, world consumption demand is depressed and the world interest rate is low, reflecting a high propensity to save. If exchange rates are allowed to float, deleveraging countries can rely on depreciations to increase production and mitigate the fall in consumption associated with debt reduction. The key insight of the paper is that in a monetary union this channel of adjustment is shut off, because deleveraging countries cannot depreciate against the other countries in the monetary union, and therefore the fall in the demand for consumption and the downward pressure on the interest rate are amplified. Hence, deleveraging can easily push a monetary union against the zero lower bound and into a recession.
    Keywords: Debt Deflation; Global Debt Deleveraging; Liquidity Trap; Monetary Union; Precautionary Savings; Sudden Stops
    JEL: E31 E44 E52 F32 F34 F41 G01 G15
    Date: 2015–03
  11. By: Andrew Watt
    Abstract: To address the on-going crisis in the euro area it is proposed to introduce a scheme of conditional, overt monetary financing of public investment (COMFOPI). The inadequate response of monetary and fiscal policy is shown to explain the weak performance of the euro area compared with other advanced countries since the crisis. The measures currently on the table, including the Juncker Plan and quantitative easing QE, are unlikely to bring about the needed substantial improvement in economic growth, while putting growth on a sustainable footing. Advantages and dangers of monetary financing of fiscal policy are discussed in the light of the recent literature. COMFOPI is a form of QE in which bonds newly issued by the European Investment Bank are purchased, on secondary markets, by the ECB, and the financial resources are made available to national governments to finance investment projects. The scheme is explicitly time-limited by being made subject to a price-stability criterion ("conditional"). The provision of central bank money leads directly to higher spending in the economy ("overt"), unlike with QE which relies on indirect channels. A number of ways to operationalise the scheme are discussed.
    Keywords: Euro area, monetary financing, quantitative easing, European Central Bank, European Investment Bank, public investment, sustainable growth
    Date: 2015
  12. By: Unalmis, Deren; Unalmis, Ibrahim
    Abstract: This study estimates the impacts of conventional and unconventional monetary policy surprises on asset markets in the United States using the heteroskedasticity-based GMM technique suggested by Rigobon and Sack (2004). Monetary policy surprises have statistically significant effects on major asset markets in both periods, yet magnitudes of responses differ notably in the unconventional period. For the unconventional period, the impacts of monetary policy surprises on stock returns and the implied volatilities in stock and bond markets are found to be lower compared to the conventional period. For most of the other asset returns however, responses are similar or higher in the unconventional period.
    Keywords: Monetary Policy; Asset Markets; Identification through Heteroscedasticity
    JEL: E43 E44 E52
    Date: 2015–03–04
  13. By: Goldstein, Itay (The Wharton School of the University of Pennsylvania); Leitner, Yaron (Federal Reserve Bank of Philadelphia)
    Abstract: Supersedes Working Paper 13-26<p>. We study an optimal disclosure policy of a regulator that has information about banks’ ability to overcome future liquidity shocks. We focus on the following tradeoff: Disclosing some information may be necessary to prevent a market breakdown, but disclosing too much information destroys risk-sharing opportunities (the Hirshleifer effect). We find that during normal times, no disclosure is optimal, but during bad times, partial disclosure is optimal. We characterize the optimal form of this partial disclosure. We relate our results to the Bayesian persuasion literature and to the debate on disclosure of stress test results.
    Keywords: Bayesian persuasion; Optimal disclosure; Stress tests
    Date: 2015–02–18
  14. By: Michael, Bryane
    Abstract: Objectives-based legislation – or laws which focus on achieving particular and concrete outcomes – has become a new and important tool that financial sector regulators use to tackle large and varied financial system risks. Yet, objectives-based legislation – and the frequent principles-based regulation underpinned by such legislation – represents a stark departure from traditional ways of legislating. In this paper, we describe the problems and prospects of implementing objectives-based financial regulation in Hong Kong – in the form of a Twin Peaks regulatory structure. A focus on the objectives of achieving financial market stability and proper market conduct would require a different approach to legislating and regulating in Hong Kong (and most other countries). By describing the way Hong Kong’s legislators would adopt such objectives-based legislation putting a Twin Peaks regulatory structure in place, we hope to shed light on the broader trend in academic and practitioner circles toward thinking about how to use objectives-based legislation to tackle complex social risks. Such an approach may also reduce the use of patchworks of complex inter-agency agreements and rulemaking between traditional regulators as they try to solve large and difficult regulatory problems.
    Keywords: twin peaks,financial regulation,hong kong,financial law
    JEL: G18 K23 G28
    Date: 2015
  15. By: Faia, Ester; Weder di Mauro, Beatrice
    Abstract: Most recent regulations establish that resolution of global banking groups shall be done according to bail-in procedures and following a Single Point of Entry (SPE) as opposed to a Multiple Point of Entry (MPE) approach. The latter requires parent holding of global groups to put up front the equity capital needed to absorb losses possibly emerging in foreign subsidiaries-branches. No model rationalized so far such resolution regime. We build a model of optimal design of resolution regimes and compare three regimes: SPE with cooperative authorities, SPE with non-cooperative authorities and MPE (ring-fencing). We find that the costs for bondholders of bail-inable instruments is generally higher under noncooperative regimes and ring-fencing. We also find that in those cases banks have ex ante incentives to reduce their exposure in foreign assets. We also examine recent case studies that help us rationalize the model results.
    Keywords: single point of entry,multiple point of entry,strategic interaction of regulators,financial spillover,financial retrenchment
    JEL: G18 F3
    Date: 2015
  16. By: YOSHIKAWA Hiroshi; AOYAMA Hideaki; IYETOMI Hiroshi; FUJIWARA Yoshi
    Abstract: Micro price data show that individual price settings are not time-invariant as presumed in the existing literature. Furthermore, the analysis of autocorrelations shows that interactions of micro prices with leads and lags ignored in the literature play a very important role in explaining the behavior of aggregate price indexes. Price indexes such as the consumer price index (CPI) contain "noises" for the purpose of macroeconomics and monetary policy. The "core" CPI used by central banks, however, is defined merely on common sense and casual observation. We present a new method of extracting information on the systemic changes of aggregate prices based on micro price data. The so-defined "true core price index" is correlated with the number of overtime hours worked, the unemployment rate, and the exchange rate. It is not significantly correlated with money supply. Our analysis also shows that inertia arising from interactions of micro prices more plausibly explains the behavior of aggregate prices than do expectations.
    Date: 2015–03
  17. By: Cenkhan Sahin; Jakob de Haan
    Abstract: Using an event study approach, we examine financial markets' reactions to the publication of the ECB's Comprehensive Assessment of banks in the euro area. Our results suggest that banks' stock market prices and CDS spreads generally did not react to the publication of the results of the Comprehensive Assessment. This conclusion also holds for banks with a capital shortfall. Only for banks in some countries do we find weak evidence for (mixed) effects on stock prices, while CDS spreads for German banks declined.
    Keywords: ECB Comprehensive Assessment; stress tests; bank equity returns; CDS Spreads
    JEL: G21 G28
    Date: 2015–02
  18. By: Gabriele Fiorentini (Università di Firenze); Alessandro Galesi (CEMFI, Centro de Estudios Monetarios y Financieros); Enrique Sentana (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: We generalise the spectral EM algorithm for dynamic factor models in Fiorentini, Galesi and Sentana (2014) to bifactor models with pervasive global factors complemented by regional ones. We exploit the sparsity of the loading matrices so that researchers can estimate those models by maximum likelihood with many series from multiple regions. We also derive convenient expressions for the spectral scores and information matrix, which allows us to switch to the scoring algorithm near the optimum. We explore the ability of a model with a global factor and three regional ones to capture inflation dynamics across 25 European countries over 1999-2014.
    Keywords: Euro area, Inflation convergence, spectral maximum likelihood, Wiener-Kolmogorov filter.
    JEL: C32 C38 E37
    Date: 2015–02
  19. By: Ahmet Sensoy; Ahmed Rostom; Erk Hacihasanoglu
    Abstract: We focus on the developments in the EMU sovereign debt markets in the last decade. First, we show the integration structure of the EMU bond markets before and after the sovereign debt crisis. Accordingly, a fair integration is observed between EMU bond markets during the pre-crisis period. However, a strict segmen-tation emerges with the sovereign debt turmoil. Second, we comment on the recent decreasing trend in EMU member bond yields and their increasing co-movement degree. Accordingly, these changes are argued to de-pend on not the fiscal performances but the illusion of quality appeared with the Fed tapering signals in 2013.
    Keywords: EMU, global financial crisis, eurozone sovereign debt crisis, systemic risk, ight to quality, Fed tapering, dynamic conditional correlation
    JEL: C58 D85 E58 E62 F34 F36
    Date: 2015–03
  20. By: Deev, Oleg; Hodula, Martin
    Abstract: In this paper we investigate the interdependence of the sovereign default risk and banking system fragility in two major emerging markets, China and Russia, using credit default swaps as a proxy for default risk. Both countries’ banking industries have strong ties with their governments and public sector, even after a series of significant reforms in the last two decades. Our analysis is built on the case studies of each country’s two biggest banks. We employ bivariate vector autoregressive (VAR) and vector error correction (VECM) framework to analyse the short- and long-run dynamics of the chosen CDS prices. We use Granger causality to describe the direction of the discovered dynamics. We find evidence of a stable long-run relationship between sovereign and bank CDS spreads in the chosen time period. The more stable relationship is found in cases, where biggest state-owned universal banks in emerging markets are closely managed by the government. But the fragility of those banks does not directly affect the state of public finance. However, in cases, where state-owned banks directly participate in large governmental projects, the banking fragility may result in deteriorations of state funds, while raising the risk of sovereign default.
    Keywords: sovereign default risk, bank default risk, CDS, emerging markets, risk transfer, financial stability
    JEL: G18 G21
    Date: 2014–12
  21. By: Kulaksizoglu, Tamer
    Abstract: This paper employs a new econometric technique to estimate the core inflation in Turkey measured as the shifting means in levels between 1955 and 2014. Using monthly series, we determine the number of shifts using the BIC, the hv-block cross-validation, the Lin-Teräsvirta parameter constancy test, and the neural networks test for neglected non-linearity. We find that there are at least three shifts in the inflation series. The findings help detect the exact dates of the shifts between different inflation regimes and the duration of each shift, which should be important information in evaluating the success of past economic policies in fighting inflation.
    Keywords: Inflation; Shifting mean autoregressive model; Transition function
    JEL: C22 C45 C52 E31
    Date: 2015–03–07

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