Dealing with Volatile Capital Flows

The tools and mechanisms with which emerging-market countries insure themselves against volatile capital flows are in a state of flux. Most emerging-market countries had accumulated an unprecedented level of international reserves before the 2008 global financial crisis. The crisis itself led to a large increase in International Monetary Fund (IMF) resources and the introduction of a new lending facility, the Flexible Credit Line. Meanwhile, some progress was made toward transforming the Chiang Mai Initiative into an Asian Monetary Fund, and the Greek debt crisis even prompted calls for the creation of a European Monetary Fund. How have emerging-market countries dealt with capital flow volatility in the current crisis? What is the appropriate level of reserves for emerging-market countries? How can international crisis-lending and liquidity-provision arrangements be improved? What role can financial regulation and capital controls play in dealing with volatile capital flows? Olivier Jeanne discusses these and other important questions that are useful to keep in mind when thinking about the reform of international liquidity provision for emerging-market countries to deal with volatile capital flows. Jeanne concludes that the IMF and the international community should make more efforts to establish normative rules for the appropriate level of prudential reserves in emerging-market and developing countries and actively develop with its members a code of good practice for prudential capital controls.

International Monetary Stability via a Global Currency?

In our current time the idea of a global currency seems to be pathbreaking. However, the introduction of such a currency requires a uniform governance which implicates that countries lose national autonomy. Presently, countries prefer national monetary policy and national financial regulation. Moreover, it is not obvious that integration of the world economy is already advanced enough to justify a global currency (if one takes criteria applied to regional currencies as a benchmark). With increasing economic integration and succesful international coooperation, howver, this scenario may change in the future.exchange rates, international monetary arrangements, global currency

Interbank market integration under asymmetric information

We argue that the main barrier to an integrated international interbank market is the existence of asymmetric information between different countries, which may prevail in spite of monetary integration or successful currency pegging. In order to address this issue, we study the scope for international interbank market integration with unsecured lending when cross-country information is noisy. We find not only that an equilibrium with integrated markets need not always exist, but also that when it does, the integrated equilibrium may coexist with one of interbank market segmentation. Therefore, market deregulation, per se, does not guarantee the emergence of an integrated interbank market. The effect of a repo market which, a priori, was supposed to improve efficiency happens to be more complex: it reduces interest rate spreads and improves upon the segmentation equilibrium, but\ it may destroy the unsecured integrated equilibrium, since the repo market will attract the best borrowers. The introduction of other transnational institutional arrangements, such as multinational banking, correspondent banking and the existence of "too-big-to-fail" banks may reduce cross country interest spreads and provide more insurance against country wide liquidity shocks. Still, multinational banking, as the introduction of repos, may threaten the integrated interbank market equilibrium.Banking theory, asymmetric information, financial integration, interbank markets, diamond-dybvig

A Post Market Reform Analysis of Monetary Conditions Index for Nigeria

The introduction of SAP and the accompanying financial market reform in 1986, witnessed a continuous decline of emphasis on direct monetary controls by the Central Bank of Nigeria (CBN) such that the Naira is allowed to freely float while trade and exchange controls were liberalized, market based interest rate policy was introduced and mandatory credit allocation was abolished to pave way for effective implementation of a market based system whereby the use of market forces is encouraged. This led to significant changes in the monetary policy framework of the CBN. However, while the post SAP monetary policy strategies, institutional framework and arrangements as well as instruments have been adequately given research attention, the monetary conditions arising from the adoption of these different strategies, framework and instruments have been largely ignored. The study applied a bounds testing approach to cointegration to estimate the weights of the variables in the broad monetary conditions index for Nigeria for the period 1989:Q1 to 2012:Q2. The result attached a higher weight to interest rate channel, followed by exchange rate channel and then credit channel, implying that interest rate channel is more important than the exchange rate and credit channel in determining the level of output in Nigeria. The resultant monetary conditions index traces fairly well the policy direction of the Central Bank of Nigeria for the studied period, hence can serve as an adequate gauge of monetary policy stance of the CBN. Keywords: Monetary policy, monetary conditions, monetary transmission, ARDL, cointegratio

The European Union and monetary integration in West Africa. ZEI Discussion Paper No. C206, 2011

This paper argues that developments in Europe have been the most important variable in monetary integration in West Africa. It shows how monetary integration in West Africa has historically been influenced by two colonial powers: Britain and France and the state of the relationship between these two European countries. The consequence of the above is that Britain and France have become major stakeholders in West Africa and failure to consult them in monetary integration matters in the region has always led to suboptimal results in the integration process. The modest monetary integration success that has been achieved by the Francophone West African countries for instance have been extensively aided by France which has acted as the agency of restraint to the arrangement. On the other hand ECOWAS wide regional integration arrangements have been mainly unsuccessful because of the sometimes divergent interests of France and Britain in the region. The consequence is that the idea of a unified West African monetary area has always failed to gain the support of the two powerful European stakeholders. Specifically, neither Britain nor France is willing to act as an agency of restraint for the entire West Africa. The absence of an agency of restraint also explains the inability of Nigeria and Ghana to achieve the establishment of a second monetary zone in the region. The new program, unfortunately, has provided no institutional framework for dealing with outside stakeholders. Despite the above shortcomings, the paper argues that the changing political landscape in Europe may alter the nature of incentives behind the interest of foreign stakeholders in the region. This in itself could create new opportunities for a region wide monetary integration program in West Africa. To achieve its aim, this paper, including the current introductory section (Part One), is divided into seven parts. Part Two traces the origins of monetary integration in the West African sub-region while Part Three critiques the post-independence ECOWAS wide monetary integration programs in the sub region. Part Four analyses the operations of the monetary integration program in post independence Francophone West Africa while Part Five examines the origins and operational modalities of the Second Monetary Zone. Part Six attempts an analysis of the future direction and opportunities for an ECOWAS-wide monetary integration Program while Part Seven concludes the paper

Central Bank’s Role and Involvement in Bank Regulation: Lender of Last Resort Arrangements and the Special Resolution Regime (SRR)

This paper considers developments which have necessitated greater involvement and a greater role for the central bank in financial regulation and supervision. The aftermath of the 2007/08 Financial Crisis has witnessed the enactment of legislation such as the Banking Act of 2009 which has not only introduced greater statutory powers for the central bank, but also the Special Resolution Regime. As well as a consideration of arguments which are in favour of the central bank’s role as supervisor and lender of last resort, the importance of central bank independence and safeguards which exist to ensure that sufficient accountability is fostered, will be considered. Safeguards and accountability mechanisms which are adequate, such that, whilst ensuring that the regulator is not susceptible to regulatory capture, do not impede the ability of such a regulator to obtain vital and necessary information from systemically important individual financial institutions. In its support of the view that central banks should assume a greater role in supervision, this paper not only seeks to justify why such a degree of involvement is vital to ensuring and maintaining stability in the financial system, but also those factors which are considered to be necessary if such a role is to be effectiv

The Choice of Exchange Rate Regimes in the MENA Countries: a Probit Analysis

This paper analysis the choice of exchange regimes of 17 economies in the MENA region for the period 1990-2000. For this purpose we use both de jure and de facto regime classifications and estimate a series of binomial and multinomial probit models. Regressions results highlight the important influence of economic development and international reserve levels on exchange regime selection.http://deepblue.lib.umich.edu/bitstream/2027.42/64398/1/wp899.pd

The Need for Government and Central Bank Intervention in Financial Regulation: Free Banking and the Challenges of Information Uncertainty.

Through a focus on the ever increasing need to address information asymmetries, as well as reference to the uniqueness of the degree to which systemic risks are triggered in banking, this paper aims primarily to highlight reasons why government and central bank intervention are essential and required in financial regulation. The role presently assumed by regulation is not the same as it was thirty years ago. Deregulation and conglomeration have significantly altered the landscape in which regulation previously existed and to an extent, defined the role which it presently assumes. For this reason, arguments which were (and have been) directed against government, central bank intervention, as well as the role of regulation, require re-evaluation. Deposit insurance and lender of last resort arrangements serve to instil confidence in depositors hence contributing towards safeguarding system stability and preventing unnecessary runs where panics occur. Such benefits are not only considered against those arguments advanced by antagonists of deposit insurance and lender of last resort arrangements, but also against those views which do not favour government and central bank intervention. In evaluating whether free banking is equipped with as many mechanisms and safeguards required in safeguarding the stability of the financial system, the urgency for such safety net instruments, which is attributed to the peculiar and unique nature of banking, will be considered. Contrary to the argument [that “if markets are generally better at allocating resources than governments are, then the differences or distinctions which exist between “money”and the industry that provides it (the banking industry) should not serve as bases for an assumption that money and banking are exceptions to the general rule”], it has to be highlighted (for several reasons) that the banking industry could not be equated to other areas of the financial sector. One of such reasons relates to the extent to which the impact of systemic runs differ within the banking sector when compared to other areas such as the securities markets. The differences in the nature of risks which exist in banking and those which exist within the securities markets, constitutes another reason why the need for government and central bank intervention is advocated. Furthermore, even though the nature of banking risks warrants government and central bank intervention – as well as capital adequacy regulation, capital regulation should also be extended to the securities markets for many reasons – one of which is the ability to securitise assets. If there was no longer a role for regulation, then re- regulation should not have occurred in certain jurisdictions which have adopted and successfully implemented consolidated supervision

The IMF's Stand-by Arrangements and the Economic Downturn in Eastern Europe: The Cases of Hungary, Latvia, and Ukraine

This paper looks at three countries that have been hard-hit by the world economic recession, and have turned to the IMF for assistance: Hungary, Latvia, and Ukraine. In all of these countries, it would appear that there were more sensible responses to the crisis that would reduce the loss of employment and output, cuts in social services, and political instability that have resulted from the downturn. Instead, the governments' responses to the downturn as well as IMF conditions for assistance have caused additional harm

The Eurozone Debt Crisis and the European Banking Union:A Cautionary Tale of Failure and Reform

The 2008 global financial crisis spread to most of the developed economies, including those of the European Union. Unfortunately, despite decades of effort to build a Single Financial Market, almost all EU jurisdictions lacked proper crisis resolution mechanisms, especially with respect to the cross-border dimensions of a global crisis. This led to a threat of widespread bank failures in EU countries and near collapse of their financial systems. Today, in the context of the Eurozone financial crisis, the EU is at a critical crossroads. It has to decide whether the road to recovery runs through closer integration of financial policies and of bank supervision and resolution, or whether to take the path of fragmentation with a gradual return to controlled forms of protectionism in the pursuit of narrow national interest, although the latter is bound to endanger the single market. Therefore, the policy dilemmas facing the EU and contemporary institution building within the Eurozone provide a key window into the future of both global and regional financial integration