nep-mon New Economics Papers
on Monetary Economics
Issue of 2015‒05‒22
thirty papers chosen by
Bernd Hayo
Philipps-Universität Marburg

  1. Negative nominal central bank policy rates: where is the lower bound? By McAndrews, James J.
  2. Maintaining Central-Bank Financial Stability under New-Style Central Banking By Robert E. Hall; Ricardo Reis
  3. Indexation, Monetary Accomodation and Inflation in Brazil By Eliana A. Cardoso
  4. Quantity Theory of Money Redux? Will Inflation Be the Legacy of Quantitative Easing? By William R. Cline
  5. The global implications of diverging monetary policy settings in advanced economies By Dudley, William
  6. How Independent are the South African Reserve Bank’s Monetary Policy Decisions? Evidence from a Global New-Keynesian DSGE Model By Annari De Waal; Rangan Gupta; Charl Jooste
  7. Non-Neutrality of Open-Market Operations By Benigno, Pierpaolo; Nisticò, Salvatore
  8. A Narrative Indicator of Monetary Conditions in China By Sun, Rongrong
  9. Let's talk about it: what policy tools should the Fed "normally" use? By Barnes, Michelle L.
  10. The Demand for Money in High Inflation Processes By Octavio A. F. Tourinho
  11. SNAP: should we be worried about a sudden, sharp rise from low, long-term rates? By Ozdagli, Ali K.
  12. Coordination and Crisis in Monetary Unions By Aguiar, Mark; Amador, Manuel; Farhi, Emmanuel; Gopinath, Gita
  13. Financial Flows and the International Monetary System By Passari, Evgenia; Rey, Hélène
  14. Dispersion of inflation expectations in the European Union during the global financial crisis By Jan Acedanski; Julia Wlodarczyk
  15. Trade finance and international currency By Liu, Tao
  16. Exchange Rate Pass-Through in an Emerging Market: The Case of the Czech Republic By Jan Hájek; Roman Horváth
  17. Financial Flows and the International Monetary System By Evgenia Passari; Hélène Rey
  18. Remarks on Monetary Policy : a speech at the C. Peter McColough Series on International Economics Council on Foreign Relations, New York, New York, April 8, 2015. By Powell, Jerome H.
  19. Dilemma not Trilemma: The global Financial Cycle and Monetary Policy Independence By Hélène Rey
  20. Monetary transmission models for bank interest rates By Laura Parisi; Igor Gianfrancesco; Camillo Gilberto; Paolo Giudici
  21. A Tractable Model of Monetary Exchange with Ex-post Heterogeneity By Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
  22. The Demand for Money in Brazil Revisited By José W. Rossi
  23. Coffee Policy and Currency Devaluation in the 1930's By Eliana A. Cardoso
  24. U.S. consumer holdings and use of $1 Bills By Fulford, Scott L.; Greene, Claire; Murdock, William
  25. "Can Reform of the International Financial Architecture Support Emerging Markets?" By Jan Kregel
  26. "Lending Blind: Shadow Banking and Federal Reserve Governance in the Global Financial Crisis" By Matthew Berg
  27. An Over-the-Counter Approach to the FOREX Market By Geromichalos, Athanasios; Jung, Kuk Mo
  28. "Emerging Market Economies and the Reform of the International Financial Architecture: Back to the Future" By Jan Kregel
  29. The Social Costs of Currency Counterfeiting By Nathan Viles; Alexandra Rush; Thomas Rohling
  30. How do speed and security influence consumers' payment behavior? By Schuh, Scott; Stavins, Joanna

  1. By: McAndrews, James J. (Federal Reserve Bank of New York)
    Abstract: Remarks at the University of Wisconsin.
    Keywords: Danmarks Nationalbank (DNB); negative policy rates; quantitative easing; nominal interest rate; real interest rate; Fisher equation; currency; money illusion; negative yields; negative rates; negative interest rates; debt securities
    JEL: E58
    Date: 2015–05–08
  2. By: Robert E. Hall; Ricardo Reis
    Abstract: Since 2008, the central banks of advanced countries have borrowed trillions of dollars from their commercial banks in the form of interest-paying reserves and invested the proceeds in portfolios of risky assets. We investigate how this new style of central banking affects central banks' solvency. A central bank is insolvent if its requirement to pay dividends to its government exceeds its income by enough to cause an unending upward drift in its debts to commercial banks. We consider three sources of risk to central banks: interest-rate risk (the Federal Reserve), default risk (the European Central Bank), and exchange-rate risk (central banks of small open economies). We find that a central bank that pays dividends equal to a standard concept of net income will always be solvent---its reserve obligations will not explode. In some circumstances, the dividend will be negative, meaning that the government is making a payment to the bank. If the charter does not provide for payments in that direction, then reserves will tend to grow more in crises than they shrink in normal times. To prevent this buildup, the charter needs to provide for makeup reductions in payments from the bank to the government. We compute measures of the financial strength of central banks at the end of 2013, and discuss how different institutions interact with quantitative easing policies to put these banks in less or more danger of instability. We conclude that the risks to financial stability are real in theory, but remote in practice today.
    JEL: E42 E58
    Date: 2015–05
  3. By: Eliana A. Cardoso
    Date: 2015–01
  4. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: Since the onset of the Federal Reserve's unconventional program of large scale asset purchases, known as quantitative easing (QE), some economists and financial practitioners have feared that the consequent buildup of the Fed’s balance sheet could lead to a large expansion of the money supply, and that such an increase could cause a sharp rise in inflation. So far fears about induced inflation have not been validated. This Policy Brief examines the basis for the original concerns about inflation in terms of the classic quantity theory of money, which holds that inflation occurs when the money supply expands more rapidly than warranted by increases in real production. The Brief first reviews the US experience and shows that whereas rapid money growth might have been a plausible explanation of inflation in the 1960s through the early 1980s, subsequent data have not supported such an explanation. It then shows that the quantity theory of money has not really been put to the test after the Great Recession, because a sharp increase in banks’ excess reserves and corresponding sharp decline in the “money multiplier” has meant that the rise in the Federal Reserve’s balance sheet has not translated into increased money available to the public in the usual fashion. The most likely aftermath of quantitative easing remains one of benign price behavior. However, if nascent inflationary conditions materialize, the Federal Reserve will need to manage adroitly the large amounts of banks’ excess reserves that have accumulated as a consequence of QE in order to limit inflationary pressures.
    Date: 2015–05
  5. By: Dudley, William (Federal Reserve Bank of New York)
    Abstract: Panel Remarks at the Sixth High Level Conference on the International Monetary System: Monetary Policy Challenges in a Changing World, Zurich, Switzerland.
    Keywords: emerging market economies (EMEs); normalization; lift-off; unconventional monetary policy; transparency; global capital flows; foreign exchange; financial asset prices
    JEL: E58
    Date: 2015–05–12
  6. By: Annari De Waal (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Charl Jooste (Department of Economics, University of Pretoria)
    Abstract: We study the response of South African monetary policy decisions to foreign monetary policy shocks. We estimate the extent of foreign monetary policy pass-through by augmenting standard Taylor rules and comparing the results within the context of a Global New-Keynesian Dynamic Stochastic General Equilibirum (DSGE) model. The general equilibrium model captures important spill-over effects that would otherwise have been ignored in a single equation setup. The results show that the relationship between foreign monetary policy shocks and South African interest rates is complicated - South Africa does not import foreign monetary policy directly, but is still affected. Except for the U.S. an increase in foreign interest rates lead to a decrease in South African interest rates - highlighting the complex channels that monetary policy authorities have to monitor outside of its economy.
    Keywords: Monetary policy, Contagion, Global New-Keynesian DSGE model
    JEL: C20 C30 E43
    Date: 2015–05
  7. By: Benigno, Pierpaolo; Nisticò, Salvatore
    Abstract: Unconventional monetary policy can have consequences for inflation and output because of income losses on central-bank balance sheet. A proposition of neutrality holds under some special monetary and fiscal policy regimes in which the treasury is ready to back central bank's losses through appropriate transfers levied as taxes on the private sector. In absence of fiscal backing, large and recurrent central bank's losses can undermine its long-run solvency and should be resolved through a prolonged increase in inflation. Small and infrequent losses are backed by future profits without any further consequences. A central bank averse to declining net worth commits to a more inflationary stance and delayed exit strategy from a liquidity trap. If fiscal policy is active, it is also desirable to reduce the duration of central bank's losses through higher inflation.
    Keywords: central bank's balance sheet; QE; unconventional monetary policy
    JEL: E40
    Date: 2015–05
  8. By: Sun, Rongrong
    Abstract: In this paper, we apply the narrative approach, studying the PBC's historical records, to infer policy-makers' intentions and thereby build a time series of monetary policy indicator. We show that our narrative policy indicator is informative about economic activity. Changes in it reflect the PBC's responses to its perceptions of economic conditions. It is a good indicator of monetary policy actions. Finally, we show that compared to monetary aggregates, changes in interest rates and the required reserve ratio are more associated with changes in monetary policy, as measured by our narrative indicator, but only to a limited degree. None of them alone can be a good proxy of policy indicator.
    Keywords: the narrative-based policy indicator, quantitative policy measures, VAR, predictive power
    JEL: E52 E58
    Date: 2015
  9. By: Barnes, Michelle L. (Federal Reserve Bank of Boston)
    Abstract: During the onset of a very severe financial and economic crisis in 2008, the federal funds rate reached the zero lower bound (ZLB). With this primary monetary policy tool therefore rendered ineffective, in November 2008 the Federal Reserve started to use its balance sheet as an alternative policy tool when it began the large-scale asset purchases. Now attention is turning to how the Fed should transition back to a more conventional monetary policy stance. Largely missing from these discussions about the Fed's "exit strategy" is a consideration that perhaps it should retain, not discard, the balance sheet tools. Since the Dodd-Frank Act (DFA) has added maintaining financial stability to the Fed's existing dual mandate to achieve maximum sustainable employment in the context of price stability, it might be beneficial to have several tools to achieve multiple policy objectives. An additional consideration is that some of these tools may be needed to stem future crises as a result of the DFA's new limitations on how the Fed can provide liquidity under such adverse circumstances. In an effort to spur a broader debate, this brief discusses what is known and knowable regarding the effectiveness of balance sheet tools and examines four primary arguments for keeping these as part of the Fed's toolkit.
    JEL: E52 E58 G01 G12
    Date: 2014–12–29
  10. By: Octavio A. F. Tourinho
    Date: 2015–01
  11. By: Ozdagli, Ali K. (Federal Reserve Bank of Boston)
    Abstract: Despite the expectations of FOMC and market participants at the beginning of 2014 to the contrary, the yield on 10-year U.S. Treasury debt declined by about 50 basis points from 2.72 percent at the beginning of 2014 to 2.17 percent as of December 22, 2014. This raises the worrisome possibility that we might observe a sudden change in longer-term yields once the Federal Reserve announces an increase in short-term rates. In other words, longer-term rates could snap, very much as they did in the summer of 2013 after the tapering announcement, once the Fed announces its first short-term rate hike indicating the end of the era of loose monetary policy. In order to study this possibility, this paper examines reactions to Fed announcements during the period when conventional monetary policy tools were used, to investigate whether FOMC announcements that imply reversals in the monetary policy stance have a greater effect on longer-term Treasury yields than similar monetary policy actions that do not imply a policy reversal.
    JEL: R11 R23
    Date: 2014–12–01
  12. By: Aguiar, Mark (Princeton University); Amador, Manuel (Federal Reserve Bank of Minneapolis); Farhi, Emmanuel (Harvard University); Gopinath, Gita (Harvard University)
    Abstract: We study fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over-borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises.
    Keywords: Debt crisis; Coordination failures; Monetary union; Fiscal policy
    JEL: E40 E50 F30 F40
    Date: 2015–05–11
  13. By: Passari, Evgenia; Rey, Hélène
    Abstract: We review the findings of the literature on the benefits of international financial flows and find that they are quantitatively elusive. We then present evidence on the existence of a global cycle in gross cross border flows, asset prices and leverage and discuss its impact on monetary policy autonomy across different exchange rate regimes. We focus in particular on the effect of US monetary policy shocks on the UK's financial conditions.
    Keywords: financial integration; monetary policy
    JEL: E5 F3
    Date: 2015–05
  14. By: Jan Acedanski (University of Economics in Katowice); Julia Wlodarczyk (University of Economics in Katowice)
    Abstract: Inflation expectations, both their median and dispersion, are of a great importance to the effectiveness of monetary policy. The goal of this paper is to examine the impact of the global financial crisis on dispersion of inflation expectations in the European Union. Using European Commission’s survey data, we find that in the early phase of the crisis the dispersion dropped rapidly but then, after Lehman Brothers’ collapse, the trend reversed and these fluctuations cannot be explained by movements of inflation rates and other commonly used factors. We also observe that, in the new European Union member states, the initial drop of the dispersion was weaker whereas the subsequent rise was stronger as compared to the old member states.
    Keywords: inflation expectations, survey data, global financial crisis, European Union
    JEL: C33 C42 D84 E31
    Date: 2015–05
  15. By: Liu, Tao
    Abstract: The determinants of international currency received a lot of academic attention since great recession, especially given China's intention to internationalize RMB. Recent empirical studies in history and international economics confi�rmed the importance of �nancial market development in this process. To provide micro-foundation for such observation, I built a two-country monetary search model with �nancial friction. Trade takes a long time, and the lack of trust makes importer and exporter rely on bank-intermediated �nance. The choice of international currency is related with terms of trade, monetary policy, and �nancial market development. The eff�ect of monetary policy on international trade di�ffers according to currency regime. Related topic such as size eff�ect and capital account liberalization is also discussed.
    Keywords: International currency; RMB internationalization; monetary search
    JEL: E42 F33 F41
    Date: 2015–05–14
  16. By: Jan Hájek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic); Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nábreží 6, 111 01 Prague 1, Czech Republic; Institute for East and Southeast European Studies, Regensburg, Germany)
    Abstract: We examine exchange rate pass-through, or how domestic prices respond to exchange rate shocks, in the Czech Republic from 1998 to 2013 by employing vector autoregression models. Using the aggregate consumer price index and its sub-components, we find that the degree of passthrough is incomplete except for food prices. The peak response occurs between 9 and 13 months after the exchange rate shock. The long-term pass-through is approximately 50% at the aggregate level. The degree of pass-through is greater for tradables than for non-tradables. The results also suggest that the exchange rate pass-through becomes slower but more complete during the financial crisis experienced in period considered.
    Keywords: exchange rate pass-through, Czech Republic, inflation, vector autoregression
    JEL: E31 E52 E58 F31
    Date: 2015–04
  17. By: Evgenia Passari; Hélène Rey
    Abstract: We review the findings of the literature on the benefits of international financial flows and find that they are quantitatively elusive. We then present evidence on the existence of a global cycle in gross cross border flows, asset prices and leverage and discuss its impact on monetary policy autonomy across different exchange rate regimes. We focus in particular on the effect of US monetary policy shocks on the UK's financial conditions.
    JEL: E5 F3
    Date: 2015–05
  18. By: Powell, Jerome H. (Board of Governors of the Federal Reserve System (U.S.))
    Date: 2015–04–08
  19. By: Hélène Rey
    Abstract: There is a global financial cycle in capital flows, asset prices and in credit growth. This cycle co‐moves with the VIX, a measure of uncertainty and risk aversion of the markets. Asset markets in countries with more credit inflows are more sensitive to the global cycle. The global financial cycle is not aligned with countries’ specific macroeconomic conditions. Symptoms can go from benign to large asset price bubbles and excess credit creation, which are among the best predictors of financial crises. A VAR analysis suggests that one of the determinants of the global financial cycle is monetary policy in the centre country, which affects leverage of global banks, capital flows and credit growth in the international financial system. Whenever capital is freely mobile, the global financial cycle constrains national monetary policies regardless of the exchange rate regime. For the past few decades, international macroeconomics has postulated the “trilemma”: with free capital mobility, independent monetary policies are feasible if and only if exchange rates are floating. The global financial cycle transforms the trilemma into a “dilemma” or an “irreconcilable duo”: independent monetary policies are possible if and only if the capital account is managed. So should policy restrict capital mobility? Gains to international capital flows have proved elusive whether in calibrated models or in the data. Large gross flows disrupt asset markets and financial intermediation, so the costs may be very large. To deal with the global financial cycle and the “dilemma”, we have the following policy options: ( a) targeted capital controls; (b) acting on one of the sources of the financial cycle itself, the monetary policy of the Fed and other main central banks; (c) acting on the transmission channel cyclically by limiting credit growth and leverage during the upturn of the cycle, using national macroprudential policies; (d) acting on the transmission channel structurally by imposing stricter limits on leverage for all financial intermediaries.
    JEL: E5 F02 F33 G15
    Date: 2015–05
  20. By: Laura Parisi (Department of Economics and Management, University of Pavia); Igor Gianfrancesco (Banco di Desio e della Brianza, Risk Management Division); Camillo Gilberto (Banca Monte dei Paschi di Siena); Paolo Giudici (Department of Economics and Management, University of Pavia)
    Abstract: Monetary policies, either actual or perceived, cause changes in monetary interest rates. These changes impact the economy through financial institutions, which react to changes in the monetary rates with changes in their administered rates, on both deposits and lendings. The dynamics of administered bank interest rates in response to changes in money market rates is essential to examine the impact of monetary policies on the economy. Chong et al. (2006) proposed an error correction model to study such impact, using data previous to the recent financial crisis. In this paper we examine the validity of the model in the recent time period, characterised by very low monetary rates. The current state of close-to-zero interest rates is of particular relevance, as it has never been studied before. Our main contribution is a novel, more parsimonious, model and a predictive performance assessment methodology, which allows to compare it with the error correction model. We also contribute to the literature on interest rate risk modelling proposing a forward looking method to allocate on-demand deposits to non-zero time maturity bands, according to the predicted bank rates.
    Keywords: Error Correction Model, Forecasting Bank Rates, Monte Carlo predictions, Interest Rate Risk models
    JEL: C15 C20 E47 G32
  21. By: Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
    Abstract: We construct a continuous-time, pure currency economy with the following three key features. First, our modelled economy incorporates idiosyncratic uncertainty—households receive infrequent and random opportunities of lumpy consumption—and displays an endogenous, non-degenerate distribution of money holdings. Second, the model is tractable: properties of equilibria can be obtained analytically, and equilibria can be solved in closed form in a variety of cases. Third, it admits as a special, limiting case the quasi-linear economy of Lagos and Wright (2005) and Rocheteau and Wright (2005). We use our modeled economy to obtain new insights into the effects of anticipated inflation on individual spending behavior, the social benefits and output effects of inflationary transfer schemes, and transitional dynamics following unanticipated monetary shocks.
    JEL: E0 E41 E52
    Date: 2015–05
  22. By: José W. Rossi
    Date: 2015–01
  23. By: Eliana A. Cardoso
    Date: 2015–01
  24. By: Fulford, Scott L. (Boston College); Greene, Claire (Federal Reserve Bank of Boston); Murdock, William (Harvard University)
    Abstract: Small denominations play a special role in a payments ecosystem because they facilitate exchange for small-value goods and services. This report examines the $1 bill holdings of adults in the United States using data from the Diary of Consumer Payments Choice (DCPC). Simply knowing the number of $1 bills in circulation is not useful for understanding consumers' actions, since many of these bills are held by merchants. The costs and benefits to the consumer of carrying $1 bills have been largely ignored in the policy discussion of the costs of switching from dollar notes to dollar coins. Knowing the facts about U.S. adult consumers' holdings of $1 bills represents a first step toward gaining an understanding of these costs and benefits to consumers.
    Keywords: money demand; currency denominations; $1 bill; Diary of Consumer Payment Choice
    JEL: D14 E41
    Date: 2015–01–01
  25. By: Jan Kregel
    Abstract: The developed world's policy response to the recent financial crisis has produced complaints from Brazil of "currency wars" and calls from India for increased policy coordination and cooperation. Chinese officials have echoed the "exorbitant privilege" noted by de Gaulle in the 1960s, and Russia has joined China as a proponent of replacing the dollar with Special Drawing Rights. However, none of the proposed remedies are adequate to achieve the emerging market economies' objective of joining the ranks of industrialized, developed countries.
    Date: 2015–02
  26. By: Matthew Berg
    Abstract: The 2008 Federal Open Market Committee (FOMC) transcripts provide a rare portrait of how policymakers responded to the unfolding of the world's largest financial crisis since the Great Depression. The transcripts reveal an FOMC that lacked a satisfactory understanding of a shadow banking system that had grown to enormous proportions--an FOMC that neither comprehended the extent to which the fate of regulated member banks had become intertwined and interlinked with the shadow banking system, nor had considered in advance the implications of a serious crisis. As a consequence, the Fed had to make policy on the fly as it tried to prevent a complete collapse of the financial system.
    Date: 2015–05
  27. By: Geromichalos, Athanasios; Jung, Kuk Mo
    Abstract: The FOREX market is an over-the-counter market (in fact, the largest in the world) characterized by bilateral trade, intermediation, and significant bid-ask spreads. The existing international macroeconomics literature has failed to account for these stylized facts largely due to the fact that it models the FOREX as a standard Walrasian market, therefore overlooking some important institutional details of this market. In this paper, we build on recent developments in monetary theory and finance to construct a dynamic general equilibrium model of intermediation in the FOREX market. A key concept in our approach is that immediate trade between ultimate buyers and sellers of foreign currencies is obstructed by search frictions (e.g., due to geographic dispersion). We use our framework to compute standard measures of FOREX market liquidity, such as bid-ask spreads and trade volume, and to study how these measures are affected both by macroeconomic fundamentals and the FOREX market microstructure. We also show that the FOREX market microstructure critically affects the volume of international trade and, consequently, welfare. Hence, our paper highlights that modeling the FOREX as a frictionless Walrasian market is not without loss of generality.
    Keywords: FOREX market, over-the-counter markets, search frictions, bargaining, monetary-search models
    JEL: D4 E31 E52 F31
    Date: 2015
  28. By: Jan Kregel
    Abstract: Emerging market economies are taking an ill-targeted and far too limited approach to addressing their ongoing problems with the international financial system, according to Senior Scholar Jan Kregel. In this policy brief, he explains why only a wholesale reform of the international financial architecture can adequately address these countries' concerns. As a blueprint for reform, Kregel recommends a radical proposal advanced in the 1940s, most notably by John Maynard Keynes. Keynes was among those who were developing proposals for shaping the international financial system in the immediate postwar period. His clearing union plan, itself inspired by Hjalmar Schacht's system of bilateral clearing agreements, would have effectively eliminated the need for an international reserve currency. Under Keynes's clearing union, trade and other international payments would be automatically facilitated through a global clearinghouse, using debits and credits denominated in a notional unit of account. The unit of account would have a fixed conversion rate to national currencies and could not be bought, sold, or traded--meaning no market for foreign currency would be required. Clearinghouse credits could only be used to offset debits by buying imports, and if not used within a specified period of time, the credits would be extinguished, giving export surplus countries an incentive to spend them. As Kregel points out, this would help support global demand and enable a shared adjustment burden. Though Keynes's proposal was not specifically designed for emerging market economies, Kregel recommends combining this plan with current ideas for regionally governed institutions--to create, in other words, "regional clearing unions," building on existing swaps arrangements. Under such a system, emerging market economies would be able to pursue their development needs without reliance on the prevailing international financial architecture, in which their concerns are, at best, diluted.
    Date: 2015–02
  29. By: Nathan Viles (Reserve Bank of Australia); Alexandra Rush (Reserve Bank of Australia); Thomas Rohling (Reserve Bank of Australia)
    Abstract: Currency counterfeiting is costly for society. Law enforcement agencies allocate substantial resources to deter, detect and prosecute counterfeiting operations, households and businesses suffer a direct loss to counterfeiters and undertake costly prevention measures, and central banks spend considerable resources upgrading and improving the security of banknotes. Without these prevention efforts, there is a risk that the public could lose confidence in the currency and reduce its use relative to more costly payment alternatives. This paper examines the social costs of counterfeiting in Australia. First, we provide some statistics on counterfeiting domestically and compare Australia's experience with some other economies internationally. We find that the direct costs of counterfeiting in Australia are relatively low when compared with other economies, but that there can be substantial deadweight costs associated with prevention efforts and losses of confidence in the currency. Second, we focus on quantifying the effect of a loss of confidence in the currency. To do this, we estimate a structural vector autoregression using the Australian data. In response to a positive one standard deviation counterfeiting shock, the demand for banknotes declines and the use of credit cards and bank deposits increase. These results are consistent with the presence of substitution effects. Using a scenario to quantify the real resource costs associated with these substitution effects, our estimates suggest that an increase in counterfeiting of around A$140 000, spread over ten years, leads to a total increase in social costs of A$7.0 million. Although the statistical uncertainty implied in the model and scenario estimates is large, the results suggest that there are significant pay-offs from efforts to prevent and deter counterfeiting activity in Australia.
    Keywords: currency counterfeiting; social cost; structural vector autoregression
    JEL: C32 E42
    Date: 2015–05
  30. By: Schuh, Scott (Federal Reserve Bank of Boston); Stavins, Joanna (Federal Reserve Bank of Boston)
    Abstract: The Federal Reserve Financial Services (FRFS) strategic plan for 2012-2016 named improvements in the end-to-end speed and security of the payment system as two of its policy initiatives. End-to-end in this context means that for the first time end-users are explicitly included. Earlier versions of the strategy plan were circulated for public comment, and the feedback received by FRFS specifically identified a need for further research. This brief draws upon new data from the 2013 Survey of Consumer Payment Choice and employs econometric modeling and simulation to complement FRFS-commissioned market research on end users' preferences. The authors' approach relies on revealed preference to incorporate insight into consumers' actual behavior, not just their attitudes, and their models employ a two-stage technique, estimating, first, the influence of the simulated improvements in speed and in security on the adoption of the payment instruments considered, and, second, the influence on the choice of which of the adopted payment instruments to use. The final version of the strategic plan is currently under discussion by Federal Reserve policymakers, so all the policies and strategies discussed in this brief are preliminary.
    JEL: D12 D14 E58
    Date: 2015–02–05

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