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Essays on Money, and the Asymmetries of the International Monetary System

Essays on Money, and the Asymmetries of the International Monetary System Univesità degli Studi di Siena By Angel García Banchs http://www.angelgarciabanchs.com/ Univesità degli Studi di Roma “La Sapienza” Dipartimento di Economia Pubblica Italy, 11 th of December 2009.

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Essays on Money, and the Asymmetries of the International Monetary System

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  1. Essays on Money, and the Asymmetries of the International Monetary System Univesità degli Studi di Siena By Angel García Banchs http://www.angelgarciabanchs.com/ Univesità degli Studi di Roma “La Sapienza” Dipartimento di Economia Pubblica Italy, 11th of December 2009 PhD supervisors: Ernesto Screpanti (Univesità di Siena) Luís M. Mollejas (UCV, Caracas) Edward J. Nell (New School University, NY) PhD committee: Sergio Cesaratto (Univesità di Siena) AnnamariaSimonazzi (Univesità “La Sapienza”) Claudio Sardoni (Univesità “La Sapienza”)

  2. Structure of the Presentation • Main argument of the thesis • Theoretical framework • Structure of the thesis (Chapters I, II and III) • Chapter I • Chapter II (main chapter) • Chapter III • Final remark Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  3. Main argument of the thesis • International monetary system (IMS) is fully asymmetric (few reserve issuing economies, RIEs, and a large group of reserve earning ones, REEs). • International monetary asymmetries (IMAs) are relevant to monetary theory and policy: whether or not the central bank issues an international reserve currency affects portfolios, balance sheet structures, the flexibility of monetary and fiscal policies, interest rate targeting rules and the exchange rate regime Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  4. Main argument of the thesis • Whether or not the economy is a reserve issuing (RIE) or a reserve earning economy (REE) really, matters; and, in particular, in the case of REEs the availability of foreign currency assets (international means of payments) is fundamental to the determination of monetary and fiscal policies • Why? That, I shall soon explain. But before, I’ll explain my choice of the theoretical framework Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  5. Theoretical Framework • Into what theoretical framework can my argument be incorporated? Neoclassical, New Keynesian, Post Walrasian or Keynesian (Post Keynesian)? • The Keynesian (Post Keynesian) theory of money: money is not a veil; it affects motives and decisions (preference for liquidity in local currency) • IMAs affect the motives and behavior of all sectors (preference for liquidity foreign currency) Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  6. Theoretical Framework • Fundamental or generic uncertainty about the future, market outcomes, and credit crises, forces agents to hold local currency-denominated money and liquid assets/liabilities • While uncertainty about foreign currency flows, the international monetary system, currency crises, and the access to international means of payments (necessary for production and imports to take place) forces institutional sectors to hold liquid assets/liabilities denominated in foreign currency Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  7. Structure of the thesis • Chapter I deals with the theoretical framework and the Post Keynesian explanation for the existence of banks and money, as opposed to the mainstream transaction cost approach • Published in English in Análisis de Coyuntura, UCV, Venezuela. Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  8. Structure of the thesis • Chapter II develops the core thesis (main argument) and presents compelling evidence of the presence of IMAs • Published in Spanish in Investigación Económica, UNAM, Mexico, and also in English in the Journal of Post Keynesian Economics, USA Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  9. Structure of the thesis • Chapter III formalizes the argument by modeling the set of policy choices and behavior of REEs recurring to the PK-SFC approach to Macro and simulations, including a fiscal policy response to a global crisis like that of 2009 • Its publication its currently under the consideration of the Journal of Post Keynesian Economics, USA Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  10. Chapter I • Transaction costs and specific risks are important, and banks are the best-suited institutions to deal with the informational asymmetries not taken care of by the market mechanism. But that task is not specific to banks, as can be undertaken as well by individual lenders/investors, brokers, rating agencies, auditors, and so on • Thus, PKs argue the task specific to banks (i.e. the task that only banks are able to undertake) is: money creation. Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  11. Chapter I • The PK view and the Circuit approach are capable of explaining the core of banking and the systemic (endogenous) need for money by reversing the causal link implied by the QTM, the saving-investment cycle and the base-multiplier • But above all because they treat banks as the institutions capable of making the generic credit risk saleable, rather than as pure financial intermediaries Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  12. Chapter I • Banks transform risky, illiquid, non-marketable assets based on personal credit into safe, liquid and marketable bank deposits which are socially perceived as money (BM and QM reserves, DEP INS, interbank network, LOLR, invest capital) • Banks accommodate the liquidity demand required to deal with uncertainty and for production to take place • In the PK framework banks and money affect motives and preferences (portfolio choices and economic behavior): it is always non-neutral. Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  13. Chapter II • IMS is fully asymmetric (few RIEs, and many REEs). • IMAs are relevant to monetary theory and policy: Foreign currency liquidity preference and whether or not the central bank issues an international reserve currency affects portfolios, balance sheet structures, the flexibility of monetary and fiscal policies, interest rate targeting and the exchange rate regime Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  14. Chapter II • Both RIEs and REEs must be concerned with the FX rate, foreign capital flows and net payments to ROW. But only REEs must accumulate foreign currency assets because their local currencies do not circulate abroad. • Two effects: the quantity effect and the price effect Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  15. Chapter II • The quantity effect implies a strong policy-induced link between r and GIR: the fact that REE central banks must target a min stock of GIR affect interest rate targeting • The price effect derives from the fact that in REEs two forms of monetary reserves coexist: lcreserves and fc reserves; the price of the former is r and that of the latter x; it implies that in REEs the link between r and x weakens as fc reserves increase. The greater such a stock is the greater the capacity of the central bank to limit the impact of Δr upon x. Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  16. Chapter II • As long as foreign currency reserves are allowed to vary sufficiently, the impact upon the exchange rate can be limited: Δr >0 (<0) → fc inflows(outflows)= ΔGIR <0 (>0) → Δx ≈ 0. • This, along with the bias against currency appreciations, explains why central banks are often willing to accumulate large stocks of GIR, provide they are able to limit sterilization costs (Bres, GD vs. DS). Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  17. RIE-2° (EU) RIE-3° (UK, Jap) RIE-1° (US) Everywhere Where is it accepted? No Yes Is trade with RIE-1° large? Is the local currency accepted abroad? Regionally Yes REE (all other) No Chapter II Reserve Earning Economies (REE) and 1°, 2°, and 3° Reserve Issuing Economies (RIE) Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  18. Chapter II • Notice that although RIEs need take into account the impact of interest rate changes upon capital flows, they need not accumulate fc reserves • This implies peso/dollar (and peso/euro) rates are largely determined by the accumulation of fc reserves on the part of REEs • But, on the contrary, the exchange rate between reserve currencies (e.g. the dollar/euro rate) is mostly determined by private holdings (market or endogenously determined) Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  19. Reserve Issuing Economies Reserve Earning Economies Local Currency Reserves Foreign Currency Reserves Local Currency Reserves Interest Rate FX Rate Interest Rate Chapter II International monetary asymmetries and the link between the foreign exchange rate and the short-term interest rate Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  20. Chapter II Central Banks’ balance sheet L I A B I L I T I E S International Reserve Liabilities (IRL) IMF Base Money (BM =CASH+BRES) Notes and Coins in Circulation (CASH) Deposits from Banking Institutions (BRES) Debt Securities (DS) Deposits Public Adm (GD) Other Liabilities TOTAL LIABILITIES (LIA) C A P I T A L Capital (K) A S S E T S Gross Intl Reserves (GIR) Gold and Gold Certificates Foreign Currency Assets Other International Reserve Assets Domestic Credit (DC=CG+CFS) Credit to Gov (CG) Credit to Financial Sys (CFS) IMF Subtotal Other Assets Other Assets in Foreign Currency not GIR Other Assets TOTAL ASSETS (ASS) Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  21. Chapter II Reserve Issuing Central Banks: Main components A S S E T S Gross Intl Reserves (GIR) Gold and Gold Certificates Foreign Currency Assets Other International Reserve Assets Domestic Credit (DC=CG+CFS) Credit to Gov (CG) Credit to Financial Sys (CFS) IMF Subtotal Other Assets Other Assets in Foreign Currency not GIR Other Assets TOTAL ASSETS (ASS) L I A B I L I T I E S International Reserve Liabilities (IRL) IMF Base Money (BM =CASH+BRES) Notes and Coins in Circulation (CASH) Deposits from Banking Institutions (BRES) Debt Securities (DS) Deposits Public Adm (GD) Other Liabilities TOTAL LIABILITIES (LIA) C A P I T A L Capital (K) Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  22. Chapter II Reserve Earning Central Banks: Main components L I A B I L I T I E S International Reserve Liabilities (IRL) IMF Base Money (BM =CASH+BRES) Notes and Coins in Circulation (CASH) Deposits from Banking Institutions (BRES) Debt Securities (DS) Deposits Public Adm (GD) Other Liabilities TOTAL LIABILITIES (LIA) C A P I T A L Capital (K) A S S E T S Gross Intl Reserves (GIR) Gold and Gold Certificates Foreign Currency Assets Other International Reserve Assets Domestic Credit (DC=CG+CFS) Credit to Gov (CG) Credit to Financial Sys (CFS) IMF Subtotal Other Assets Other Assets in Foreign Currency not GIR Other Assets TOTAL ASSETS (ASS) Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  23. Chapter II • To distinguish whether or not a central bank is attempting to stabilize the currency one should look at BS rather than at the FX rate itself • In general, the larger GIR/Total Assets ratio and the (BRES+GD+DS)/Total Liabilities ratio, the greater the effort to stabilize the FX rate and endogenously sterilize (peg interest rates). That is, the smaller DC and Cash, the greater the effort • Cash substitutes and high reserve requirement rates are required in REEs for sterilization purposes Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  24. Chapter II • Monetary policy is, thus, more elastic in RIEs than in REEs, as the latter, apart from targeting short-term rates so as to influence indirectly foreign currency flows, must intervene directly so as to accumulate fc reserves (asset side) and, hence, must endogenously compensate those interventions replacing Cash with BREs, GD and DS Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  25. Chapter II Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  26. Chapter II Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  27. Chapter II Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  28. Chapter II *In SAU 44% of total liabilities correspond to other liabilities; thus, one would expect cash substitutes to be underestimated. Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  29. Chapter II Ratio of liquidity requirements Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  30. Chapter III • Chapter III formalizes the argument within the context of a REE • PK tradition: relevance of buffer stocks and stock-flow norms affecting the real and financial spheres • The relative availability of foreign currency reserves ˗ e.g. GIR/(M+Rrow) ˗ determines fiscal and monetary policies, the growth rate of government expenditures, the issue of lc and fcdebt, interest rate targeting, exchange rate intervention and sterilization, switching mechanisms Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  31. Chapter III • The initial process of foreign currency accumulation requires a sacrifice in terms of higher than desired r, a reduction in grg and, perhaps, the issue of FCD • But once a min stock for the whole economy is built, r can be set a the desired level rBG=rBGT and grg=grg* , while ΔFCD≤0 • REEs that keep accumulating reserves after the minimum has been reached become net lenders to the ROW under conditions of sustained fiscal and current account surplus (sterilization costs need not increase if BRES increase) Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  32. Chapter III Growth rate of Government Expenditures as a function of the stock of foreign currency reserves Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  33. Chapter III Foreign currency debt as a function of the stock of foreign currency reserves Interest rate setting as a function of the stock of foreign currency reserves Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  34. Chapter III • Experiments: • An increase in the target real wage rate (An autonomous increase in wage inflation) • A 1-period increase in the growth rate of government expenditures • A permanent increase in the growth rate of government expenditures • A permanent decrease in the income tax rate • A permanent decrease in the corporate tax rate • A permanent decrease in the bank tax rate • A 1-period increase in the rate of interest on T-Bills Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  35. Chapter III 8) A 5-period permanent increase interest rate of on T-Bills 9) A 1-period switch to a market-determined exchange rate 10) A permanent increase in the propensity to consume out of income 11) A permanent increase in the propensity to consume out of wealth 12) A decrease in the ROW's rate of price inflation 13) A permanent decrease in the ROW's propensity to import out of income 14) A permanent increase in the ROW's imports demand-real exchange rate elasticity Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  36. Chapter III 15) A permanent increase in the real exchange rate elasticity of the demand for imports 16) A permanent decrease in the propensity to import out of income 17) A permanent increase in foreign currency liquidity preference due to an equivalent decrease in the preference for local currency bonds 18) A permanent increase in liquidity preference due to an equivalent decrease in the preference for equities 19) A decrease in the rate of bank reserve requirements Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  37. Chapter III 20) A global economic crisis without domestic fiscal stimulus gry-row=[2009-2013]=[-2.0%, 1.5%, 1.5%, 2.0%, 2.5%]   grg=[2009-2013]=[3.0%, 3.0%, 3.0%, 3.0%, 3.0% ]   21) A global economic crisis with domestic fiscal stimulus gry-row=[2009-2013]=[-2.0%, 1.5%, 1.5%, 2.0%, 2.5%]   grg=[2009-2013]=[17.5%, 4.0%, 3.0%, 3.0%, 3.0% ]   Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  38. Chapter III Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  39. Chapter III Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  40. Chapter III Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  41. Chapter III Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  42. Chapter III Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  43. Chapter III Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  44. Final remark • IMS is fully asymmetric: whether or not the central bank issues an international reserve currency and the availability of foreign currency reserves in REEs affect portfolios, balance sheet structures, the flexibility of monetary and fiscal policies, interest rate targeting rules, the issue of lcand fc, the FX regime and sterilization policies • Not only liquidity preference in local currency, but also foreign currency liquidity preference and the IMS are responsible for global unemployment Essays on Money, and the Asymmetries of the International Monetary System - Angel GarcíaBanchs

  45. Appendix Thesis in PDF Equations of the model Ensayos sobre el dinero, y las Asimetrías del Sistema Monetario Internacional - Angel García Banchs

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