nep-cba New Economics Papers
on Central Banking
Issue of 2023‒05‒15
twenty papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy Implications of Central Bank Digital Currencies: Perspectives on Jurisdictions with Conventional and Islamic Banking Systems By Ms. Inutu Lukonga
  2. The Central Bank Crystal Ball: Temporal information in monetary policy communication By Byrne, David; Goodhead, Robert; McMahon, Michael; Parle, Conor
  3. Using Functional Shocks to Assess Conventional and Unconventional Monetary Policy in Canada By Thorsten V. Koeppl; Jeremy M Kronick; James McNeil
  4. Open Mouth Operations. Monetary Policy by Threats and Arguments. The Monthly Meetings Between the Riksbank and the Commercial Banks, 1956-73 By Jonung, Lars
  5. Bank Concentration and Monetary Policy Pass-Through By Isabel Gödl-Hanisch
  6. The effect of wage rigidity on the transmission of monetary policy to inequality By Momo Komatsu
  7. Unconventional Monetary Policy and Local Fiscal Policy By Huixin Bi; Nora Traum
  8. Drivers of Sovereign Bond Demand – The Case of Japans By Carlos Alberto Piscarreta Pinto Ferreira
  9. Central Bank Digital Currency and Financial Inclusion By Brandon Tan
  10. Capital Controls or Macroprudential Regulation: Which is Better for Land Booms and Busts? By Yang Zhou; Shigeto Kitano
  11. Inflation is Conflict By Guido Lorenzoni; Iván Werning
  12. The effects of a macroprudential loosening: the importance of borrowers’ choices By McCann, Fergal; Durante, Elena
  13. A macroprudential look into the risk-return framework of banks’ profitability By Joana Passinhas; Ana Pereira
  14. Leaning Against the Data: Policymaker Communications under State-Based Forward Guidance By Taeyoung Doh; Joseph W. Gruber; Dongho Song
  15. Foreign Reserve Management and U.S. Money Market Liquidity: A Cost of Exorbitant Privilege By Ron Alquist; Karlye Dilts Stedman; Robert Jay Kahn
  16. The Impact of Remittances on Monetary Transmission Mechanism in Remittance-recipient Countries: with Focus on Credit and Exchange Rate Channels By Jahan Abdul Raheem; Gazi M. Hassan; Mark J. Holmes
  17. Estimating the Trend of the House Price to Income Ratio in Ireland By Yao, Fang
  18. China as an International Lender of Last Resort By Sebastian Horn; Bradley C. Parks; Carmen M. Reinhart; Christoph Trebesch
  19. Currency Usage for Cross Border Payments By Ms. Longmei Zhang; Hector Perez-Saiz; Roshan Iyer
  20. Liquidity, Debt Denomination, and Currency Dominance By Coppola, Antonio; Krishnamurthy, Arvind; Xu, Chenzi

  1. By: Ms. Inutu Lukonga
    Abstract: Central bank digital currencies (CBDCs) promise many benefits but, if not well designed, they could have undesired consequences, including for monetary policy. Issuing an unremunerated CBDC or a wholesale CBDC does not change the objectives of monetary policy or the operational framework for monetary policy. CBDCs can, however, induce changes in the retail, wholesale and cross border payments that have negative spillover effects on monetary policy, through their effects on money velocity, bank deposit disintermediation, volatility of bank reserves, currency substitution, and capital flows. Countries most vulnerable are those with banking systems dominated by small retail deposits and demand deposits, low levels of digital payments and weak macro fundamentals. Proposed CBDC design features, such as caps on CBDC holdings and unremunerating the CBDC can moderate disintermediation risks, but they are not sufficient. Central banks will need to ensure that unintended macroeconomic risks are comprehensively identified and mitigated.
    Keywords: Central Bank Digital Currencies; CBDC; CBDC Pilots; Monetary Policy; Islamic Finance; impact monetary policy implementation; design option; unremunerated CBDC; monetary policy implication; deposit disintermediation; Commercial banks; Velocity of money; Islamic banking; Monetary base; Global
    Date: 2023–03–17
  2. By: Byrne, David (Central Bank of Ireland); Goodhead, Robert (Central Bank of Ireland); McMahon, Michael (University of Oxford); Parle, Conor (European Central Bank and Trinity College Dublin)
    Abstract: Effective central bank communication provides information that the public wants but does not have. Using a new textual methodology to quantify the temporal information in central bank communication, we argue that central bank assessments of the (latent) state of the economy can be the source of the public’s information deficit, rather than superior information necessarily. The implication of this is that communication of a single, fixed, reaction function, even if desirable, is likely impossible even if preferences remain fixed over time. Communication of how the central bank is assessing the economy should be emphasised in addition to any forward guidance.
    Keywords: Monetary Policy, Communication, Natural Language Processing.
    JEL: E52 E58 C55
    Date: 2023–02
  3. By: Thorsten V. Koeppl; Jeremy M Kronick (C.D. Howe Insitute); James McNeil (Dalhousie University)
    Abstract: We develop a new series of Canadian monetary policy shocks and analyze their impact on inflation and real GDP from 1996–2020. Our shocks are constructed as the daily change in the Nelson-Siegel yield curve factors after a monetary policy announcement. Because these shocks include information along the entire yield curve, they provide a more comprehensive view of Canadian monetary policy relative to the existing literature, which focuses on shocks to the short-run interest rate. We document that monetary policy shocks often twist the yield curve, which tends to make monetary policy less effective. Furthermore, we find that lower real interest rates have muted the overall impact of monetary policy over time. Looking at particular episodes, there is little evidence that forward guidance or quantitative easing had a significant impact on inflation or real GDP.
    Keywords: Monetary Policy Shocks, Canada, Yield Curve, Local Projections, Unconventional Monetary Policy
    JEL: E52 E65 C58 G12
    Date: 2023–04
  4. By: Jonung, Lars (Department of Economics, Lund University)
    Abstract: After World War II and prior to the financial deregulation of the 1980s, monetary policy in Sweden as well as in other western European countries rested chiefly on a system of far- reaching non-market-oriented controls of credit flows and interest rates. How was monetary policy conducted in such an environment of financial repression, where the central bank was unable to rely on traditional monetary policy instruments working on "free" and "unregulated" money and capital markets?<p> This study provides an answer from the Swedish experience. It is based on a unique set of confidential minutes from about 160 monthly meetings between the Riksbank and the commercial banks during the years 1956-73. These minutes, written during or directly after the meetings, have not been available to scholars before. Most likely, a similar archive material does not exist for any other country.<p> The examination of the minutes demonstrates that monetary policy was framed in a process involving threats and arguments in a small and closed club involving the central bank and the chief executives of the commercial banks. According to a joke assigned to Erik Lundberg “open market operations were replaced by open mouth operations” - albeit the dialogue was kept within the club.<p> When Swedish financial markets were deregulated in the 1980s, the standard tools of monetary policy rapidly replaced the meetings between the central bank and the commercial banks. Today, the Riksbank communicates in an open way to all financial market participants, instead of turning to a small set of commercial bankers in meetings closed to outsiders.
    Keywords: Credit controls; interes rate controls; exchange controls; financial repression; liquidity ratios; the Riksbank; Sweden
    JEL: B22 E42 E50 E58 E65 G21 N14
    Date: 2023–04–24
  5. By: Isabel Gödl-Hanisch
    Abstract: This paper analyzes the implications of the gradual rise in bank concentration since the 1990s for the transmission of monetary policy. I use branch-level data on deposit and loan rates to evaluate the monetary policy pass-through conditional on the level of local bank concentration and bank capitalization. I find that banks operating in high-concentration markets and under-capitalized banks adjust short-term lending rates more. I then build a theoretical model with heterogeneous banks that rationalizes the empirical findings and explains the underlying mechanism. In the model, monopolistic competition in local deposit and loan markets, along with bank capital requirements, lead to frictions on the pass-through to the real economy. Counterfactual analyses highlight that the rise in bank concentration alters monetary policy pass-through by two channels: the market power and capital allocation channels. Both channels further strengthen monetary policy transmission to output and investment, amplify the credit cycle, and flatten the Phillips curve.
    Keywords: monetary transmission, bank heterogeneity, monopolistic competition, bank regulation
    JEL: E44 E51 E52 G21
    Date: 2023
  6. By: Momo Komatsu
    Abstract: What is the effect of wage rigidities on the transmission of monetary policy to inequality? This paper investigates this question with a Two-Agent New Keynesian model with financially constrained and unconstrained households, and with search-and-matching frictions. I study the relative effects of the wage channel and the labour market channel in the transmission of conventional and unconventional monetary policy, and how these change with degrees of wage rigidity. My main result is that the stickier the wage, the more a contractionary monetary policy shock reduces consumption inequality, whether that is conventional monetary policy or quantitative tightening, driven by the wage channel.
    Date: 2023–03–31
  7. By: Huixin Bi; Nora Traum
    Abstract: Following the onset of the pandemic, the Federal Reserve employed an unconventional monetary policy that directly intervened in municipal bond markets. We characterize the fiscal and macroeconomic implications of such central bank actions in a New Keynesian model of a monetary union. We assume that state and local governments are subject to a loan-in-advance constraint, reflecting that with lumpy cash flows, they often finance a fraction of expenditures by issuing short-term bonds. The municipal debt is held by financial intermediaries, who also supply credit to the private sector. Direct central bank purchases can transmit to the economy through two main channels: 1) by alleviating cash flow problems of the regional governments and 2) by accelerating lending to the private sector if credit constraints ease more broadly. By quantifying the relative importance of these channels, we highlight that the central bank’s actions lead to sizable increases in private investment but have more muted effects on state and local government expenditures. In addition, we also show the transmission of direct federal government aid through intergovernmental transfers is markedly different from unconventional policy.
    Keywords: monetary policy; quantitative easing; municipal debt; Municipal Liquidity Facility (MLF)
    JEL: E52 E58 E62
    Date: 2022–11–07
  8. By: Carlos Alberto Piscarreta Pinto Ferreira
    Abstract: The aim of this empirical paper is to understand the portfolio decisions of banks regarding their asset allocation to sovereign bonds applied to the case of Japan, over the period 2002-21. The issue is relevant because globally central banks are moving to a passive holder or even net seller stance, raising the question of whether banks can be counted among the investors which will replace them. Japan makes an interesting case since Japanese banks are among the banks in advanced economies with a larger share of non-official holdings of domestic sovereign debt, their mean ratio of gross claims on the central government to total assets is about three times above average values in the United States or in the Euro Area, and government portfolios are relatively more homogeneous. We contribute to the existing literature by exploring the impact of unconventional monetary policy on sovereign bond bank demand and putting to test the significance of risk on banks´ asset portfolio decisions using a dynamic rather than a static setting. Our results show that banks struggling to grow, more diversified, better capitalized, or larger banks during expansion periods tend to hold relatively fewer sovereign bonds. On the contrary, past higher profitability, higher economic volatility and funding risk encourage relatively greater holdings. Though less clearly, data also suggests that banks facing weaker loan performance and regional banks with more significant need of collateral hold a higher proportion of sovereign bonds. Quantitative and Qualitative Monetary Easing had a major disruptive effect over banks’ government bond demand. Excess reserves at the Bank of Japan became a low risk/low return alternative to government bonds, as banks with relatively higher excess reserves have relatively less government bond holdings in their assets. Going forward, only a reversion of the monetary base expansion may help government bonds regain their role of the single riskless asset for Japanese banks.
    Keywords: Sovereign Debt, Portfolio Choice, Banks, Monetary Policy, Panel Data
    JEL: C23 E58 G11 G21 H63
    Date: 2023–03
  9. By: Brandon Tan
    Abstract: In this paper, we develop a model incorporating the impact of financial inclusion to study the implications of introducing a retail central bank digital currency (CBDC). CBDCs in developing countries (unlike in advanced countries) have the potential to bank large unbanked populations and boost financial inclusion which can increase overall lending and reduce bank disintermediation risks. Our model captures two key channels. First, CBDC issuance can increase bank deposits from the previously unbanked by incentivizing the opening of bank accounts for access to CBDC wallets (offsetting potential flows from deposits to CBDCs among those already banked). Second, data from CBDC usage allows for the building of credit to reduce credit-risk information asymmetry in lending. We find that CBDC can increase overall lending if (1) bank deposit liquidity risk is low, (2) the size and relative wealth of the previously unbanked population is large, and (3) CBDC is valuable to households as a means of payment or for credit-building. CBDC can still be optimal for household welfare even when overall lending decreases as households benefit from the value of using CBDC for payments, CBDC provides an alternative "safe" savings vehicle, and CBDC generates greater surplus in lending by reducing credit-risk information asymmetry. Most countries are considering a "two-tier" CBDC model, where central banks issue CBDC to commercial banks which in turn distribute them to consumers. If non-bank payment system providers can distribute CBDC, fewer funds will flow into deposit accounts from the unbanked because a bank account is no longer needed to access CBDC. If CBDC data is shareable with banks, those without bank accounts can still build credit and access lower interest rate loans. This design is optimal for welfare if the gains from greater access to CBDC outweigh the contraction in lending.
    Keywords: CBDC; Financial Inclusion; Digital currency; CBDC issuance; credit-risk information asymmetry; CBDC data; CBDC model; CBDC wallet; Central Bank digital currencies; Commercial banks; Deposit rates; Loans; Global
    Date: 2023–03–17
  10. By: Yang Zhou (Institute of Developing Economies, Japan External Trade Organization and Junir Research Fellow, Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration (RIEB), Kobe University, JAPAN)
    Abstract: Emerging markets have experienced land booms and busts along with international capital inflows and outflows repeatedly. This study quantitatively examines the effectiveness of (i) macroprudential policies targeting land markets and (ii) capital controls targeting capital inflows and outflows. We analyze which policy better manages the coincidence between land booms (busts) and capital inflows (outflows). We build a small open economy NK-DSGE model in which banks choose their asset portfolio between physical capital and land subject to financial constraints. The quantitative results show that the superiority of the two policies depends on the type of shock impacting a small open economy. In the case of domestic land market shocks, macroprudential policies enhance welfare, whereas capital controls reduce welfare. Conversely, in the case of foreign interest rate shocks, the superiority of the two policies is reversed: capital controls enhance welfare, while macroprudential policies deteriorate welfare.
    Keywords: Capital control; Macroprudential policy; Financial frictions; Balance sheets channel; DSGE
    JEL: E69 F32 F38 F41
    Date: 2023–04
  11. By: Guido Lorenzoni; Iván Werning
    Abstract: This paper isolates the role of conflict or disagreement on inflation in two ways. In the first part of the paper, we present a stylized model, kept purposefully away from traditional macro models. Inflation arises despite the complete absence of money, credit, interest rates, production, and employment. Inflation is due to conflict; it cannot be explained by monetary policy or departures from a natural rate of output or employment. In contrast, the second part of the paper develops a flexible framework that nests many traditional macroeconomic models. We include both goods and labor to study the interaction of price and wage inflation. Our main results provide a decomposition of inflation into “adjustment” and “conflict” inflation, highlighting the essential nature of the latter. Conflict should be viewed as the proximate cause of inflation, fed by other root causes. Our framework sits on top of a wide set of particular models that can endogenize conflict.
    JEL: E0 E12 E31
    Date: 2023–04
  12. By: McCann, Fergal (Central Bank of Ireland); Durante, Elena (Central Bank of Ireland)
    Abstract: Macroprudential policy implementation in the mortgage market has generally involved a policy tightening, as policies have been introduced in settings where no such policies previously existed. In this paper we produce rare evidence on an episode of loosening under the macroprudential regime for mortgages. We exploit a reform of the Irish borrower-based measures in 2017 that increased LTV limits for a cohort of First Time Buyers. We show in response to the reform that borrowers bunched at the new maximum LTV of 90, increasing LTVs relative to the counterfactual. We highlight an adjustment mechanism that has important policy implications: we find no evidence that treated borrowers purchased more expensive properties; rather, we find that treated borrowers post lower downpayments after the reform, displaying a preference for cash retention once the opportunity arises. While economic intuition leads one to expect house price amplification after a policy-induced credit loosening, we show that borrowers’ choices to rebalance towards greater cash retention dampened this channel in the Irish case in 2017.
    Keywords: Macroprudential policy; credit loosening; household finance
    JEL: G21 G28 G51
    Date: 2022–11
  13. By: Joana Passinhas; Ana Pereira
    Abstract: Ensuring the resilience of the financial system implies managing a trade-off between expected bank profitability and tail risk in bank returns. To describe this trade-off, we estimate a dynamic quantile regression model using bank-level data for Portugal that links future bank profitability to the current cyclical systemic risk environment net of the prevailing level of capital-based resilience (residual cyclical systemic risk). We find that an increase in residual cyclical systemic risk negatively affects the conditional distribution of bank profitability at the medium-term projection horizons, confirming the findings in the literature. We propose a novel calibration rule for the countercyclical capital buffer (CCyB), which is flexible enough to accommodate different preferences of the policymaker and factors in the prevailing levels of cyclical systemic risk and capital-based resilience. We illustrate the operationalisation of this rule under different assumptions for the policymaker preferences and show how tightening capital requirements alters the risk-return relationship of future profitability in the banking sector. We find evidence that increasing the CCyB rate improves the outlook for medium-term downside risk in bank profitability and worsens the outlook for short-term expected profitability, stressing the tradeoff faced by the policymaker when deploying policy instruments and the misalignment in the horizons at which costs and benefits take place.
    Keywords: Macroprudential policy, systemic risk, bank profitability, quantile regression
    JEL: C21 C54 G17 G21 G28
    Date: 2023–03
  14. By: Taeyoung Doh; Joseph W. Gruber; Dongho Song
    Abstract: A purported benefit of state-based forward guidance is that the private sector adjusts the expected stance of policy without further policymaker communications. This assumes a shared understanding of how policymakers are interpreting the data and that policymakers are consistent in their assessment of the data. Using text analysis, we test whether the FOMC’s introduction of state-based forward guidance in December 2012 changed the tone of policymaker communications. We find that policymakers tended to downplay positive data following the introduction of the guidance, in effect leaning against the data and reinforcing the dependence of policy expectations on policymaker communications.
    Keywords: Monetary policy; Forward guidance; Financial markets
    JEL: E30 E40 E50 G12
    Date: 2022–09–08
  15. By: Ron Alquist; Karlye Dilts Stedman; Robert Jay Kahn
    Abstract: We show theoretically and empirically that the dollar’s status as the global reserve currency can lead to economically significant changes in U.S. money market liquidity. We develop a model in which U.S. money market spreads respond to foreign central banks’ exchange-rate management decisions. Foreign central banks remove liquidity from U.S. money markets and cause spreads to widen by selling Treasuries to supply liquidity to their financial systems. Our analysis focuses on the major oil exporting countries with fixed exchange rates because their foreign-exchange market interventions are straightforward to characterize. Our regression analysis shows that shifts in the central banks’ demand for dollar liquidity related to oil price volatility are associated with significantly higher overnight spreads in domestic money markets. A one-standard deviation increase in the demand for dollar liquidity by a central bank in an oil-exporting country leads, on average, to three billion dollars of Treasury sales and a two to six basis point increase in U.S. money market spreads. At the same time, deposits held with the Federal Reserve increase in response to this higher oil-price volatility, which is consistent with the model’s predictions. This evidence indicates that the widespread use of the U.S. dollar as a reserve currency acts as a channel that can propagate funding shocks from the rest of the world to the United States.
    Keywords: central banking; markets
    JEL: E43 G12 G13 G23
    Date: 2022–09–02
  16. By: Jahan Abdul Raheem (University of Waikato); Gazi M. Hassan (University of Waikato); Mark J. Holmes (University of Waikato)
    Abstract: Remittances contribute to welfare enhancement and poverty alleviation in many remittance-recipient economies. However, recent literature also focuses on the macroeconomic impact of remittances due to their increasing inflow into these economies. We use an unbalanced heterogeneous panel Structural Vector Autoregression (SVAR) methodology to study the impact of remittances on intermediate monetary transmission channels in remittance-recipient countries. In particular, we analyse the effect of remittances on credit and exchange rate channels in these economies. We, initially, estimate credit and exchange rate impulse responses (IRs) to a shock in remittances. The IRs estimates suggest a significant variation among countries in credit and exchange rates in response to a shock in remittances. In the next stage, we run a cross-section regression of these responses to identify the factors influencing the IRs of these variables. We find that the magnitude of remittances received by an economy significantly impacts the exchange rate channel thus affecting the smooth functioning of the monetary transmission mechanism. However, the effect of remittances on the credit channel is dependent on the level of remittance inflows and savings in remittance-recipient economies. Our finding also reveals that remittances weaken the functioning of the credit channel at a higher level of remittance inflows, especially, when the remittances are higher than approximately five percent of GDP in remittance-recipient economies. Overall, our findings have broad policy implications revealing that policymakers have to pay attention to the possible effects of remittances on intermediate monetary transmission channels in achieving the monetary policy targets.
    Keywords: remittances;monetary policy;monetary transmission mechanism
    JEL: E5 E52 F24
    Date: 2023–04–20
  17. By: Yao, Fang (Central Bank of Ireland)
    Abstract: Distinguishing trends and cycles in house prices is important for macroprudential policy. This paper estimates the unobserved trend and cycles of the house-price-to income ratio (HPI) using a multivariate unobserved components model, with auxiliary variables introduced for identifying both the trend and cycles. Under this approach, the HPI trend is driven by slow-moving fundamental forces, while the cyclical component of HPI is identified by using separate cyclical indicators in a VAR. I find that the estimated trend of the HPI ratio is rising over time, driven primarily by the declining natural interest rate, and to a lesser extent by credit conditions and housing imbalances. Of relevance for macroprudential policy setting, the underlying trend in HPI has risen by 8% since the introduction of borrower-based measures in 2015.
    Keywords: real estate markets, macroprudential policy, systemic risk, financial crises, bubbles, financial regulation, financial stability indicators.
    JEL: E5 G01 G17 G28 R39
    Date: 2022–11
  18. By: Sebastian Horn; Bradley C. Parks; Carmen M. Reinhart; Christoph Trebesch
    Abstract: This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial system. A key finding is that the global swap line network put in place by the People’s Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. The swaps bolster gross reserves and are mostly drawn by distressed countries with low liquidity ratios. In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China’s overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China’s rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China's Belt and Road Initiative. These findings have implications for the international financial and monetary architecture, which is becoming more multipolar, less institutionalized, and less transparent.
    JEL: F2 F33 F42 F65 G15 H63 N25
    Date: 2023–04
  19. By: Ms. Longmei Zhang; Hector Perez-Saiz; Roshan Iyer
    Abstract: While the global usage of currencies other than the U.S. dollar and the euro for cross-border payments remains limited, rapid technological (e.g. digital money) or geopolitical changes could accelerate a regime shift into a multipolar or more fragmented international monetary system. Using the rich Swift database of cross-border payments, we empirically estimate the importance of legal tender status, geopolitical distance, and other variables vis-à-vis the large inertia effects for currency usage, and perform several forecasting simulations to better understand the role of these variables in shaping the future payments landscape. While our results suggest a substantially more fragmented international monetary system would be unlikely in the short and medium term, the impact of new technologies remains highly uncertain, and much more rapid geopolitical developments than expected could accelerate the transformation of the international monetary system towards multipolarity.
    Keywords: Cross border payments; Swift; currency dominance; legal tender; international monetary system (IMS)
    Date: 2023–03–24
  20. By: Coppola, Antonio (Stanford U); Krishnamurthy, Arvind (Stanford U); Xu, Chenzi (Stanford U)
    Abstract: We provide a liquidity-based theory for the dominant use of the US dollar as the unit of denomination in global debt contracts. Firms need to trade their revenue streams for the assets required to extinguish their debt obligations. When asset markets are illiquid, as modeled via endogenous search frictions, firms optimally choose to denominate their debt in the unit of the asset that is easiest to obtain. This gives central importance to the denomination of government-backed assets with the largest safe, liquid, short-term float and to financial market institutions that facilitate safe asset creation. Equilibria with a single dominant currency emerge from a positive feedback cycle whereby issuing in the more liquid denomination endogenously raises its liquidity, incentivizing more issuance. We rationalize features of the current dollar-dominant international financial architecture and relate our theory to historical experiences, such as the prominence of the Dutch florin and pound sterling, the transition to the dollar, and the ongoing debate about the potential rise of the Chinese renminbi.
    Date: 2023–02

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