The launch of HUFONIA and the related international experience of overnight indexed swap (OIS) markets

In relation to the October 2010 launch of the HUFONIA Swap Index, we discuss the most important characteristics of the overnight indexed swap (OIS) market, one of the fastest-growing segments of advanced money markets. OIS contracts allow for the cost-effective management of short-term interest rate risks while also facilitating profitable investment strategies to foresee the central bank's interest rate decisions, which, according to international experience, have greatly contributed to their popularity. A further benefit of OIS contracts is that partners’ credit risk and counterparty limits only play a minor role in their pricing. Looking at the underlying motives of central banks in market development, empirical analyses show that OIS markets can provide one of the most accurate indicators of short-term interest rate expectations, and could furnish additional information in the preparation and evaluation of monetary policy decisions. In conjunction, the financial crisis brought attention to the significance of the so-called LIBOR-OIS spread, an indicator also suitable for assessing the solvency of the banking system. The essential conditions of market development, such as the availability of a reliable reference rate and the presence of foreign market makers, are ensured in Hungary. However, due to the limited market size the fixed costs of market development are somewhat higher than in major currency areas. Nearly half of market makers have prepared their trading and accounting systems for transactions until 2011 Q2. Market activity could be driven by strategies aimed at mitigating or converting banks’ exposure to interest rate risks in the future.OIS, overnight indexed swap, HUFONIA, libor-ois spread, interest rate risk, policy rate expectations, market building.

Ready or not? Constructing the Monetary Union Readiness Index

While all EU Member States can join the group's monetary union, the euro area, some members are far more ready for the adoption and use of the single European currency. Here, we construct a new Monetary Union Readiness Index (MURI) for the EU Member States. The theoretical framework of the index is built on the economic theory of Optimal Currency Areas and EU regulations such as the Treaty and the Maastricht criteria, and the Regulation on the Macroeconomic Imbalance Procedure. The index measures (i) nominal convergence, (ii) real convergence, and (iii) macroeconomic stability. The MURI Index provides an easy to use real-time policy tool to evaluate both candidate and current euro area members. Hence, it complements, aggregates and communicates key information in annual convergence reports and in official statistics. Our evaluation finds that Austria, Finland, Denmark, Sweden and Germany showed the highest level of compliance with the different euro area criteria in 2018, while Greece, Cyprus, Romania, Spain, and Italy were the least compliant

Driving factors behind O/N interbank interest rates – the Hungarian experiences

This study examines overnight (O/N) interest rates which constitute the short end of the yield curve and the factors which have an impact on such rates. The MNB, unlike several other central banks, does not have a direct overnight interest rate target; it does, however, limit the divergence of O/N interest rates from its policy rate with the settings of its operational framework. First, the MNB’s regulations on compulsory reserves allow banks to apply averaging in the reserve maintenance period, which reduces overnight interest rate volatility. Second, the interest rate corridor – determined by MNB’s collateralised loan and deposit – limits the maximum fluctuation band of overnight interbank interest rates. The study finds that the role of reserve averaging to reduce yield fluctuations is imperfect, as a clear seasonal pattern is observed in the intra-maintenance period evolution of overnight rates. The frequency of cumulative front-loading and excess reserves is significantly higher than the frequency of reserve deficit. Therefore, the level of overnight interest rates tends to remain below the policy rate and drop towards the interest rates of overnight central bank deposits at the end of the maintenance period. Moreover, statistical analysis finds evidence that the impact of liquidity withdrawing shocks are typically greater – approximately twice as much – as of those injecting liquidity. This phenomenon could be explained by the volatility of autonomous liquidity factors, especially that of the government accounts, which is particularly high on VAT payment days. Institutional settings (credit limits, limitation of maximum deviation from reserve requirements, high interbank concentration) curtail the potential of the interbank market to efficiently distribute liquidity over the entire system, which may also explain the asymmetric liquidity management characteristics of Hungarian banks.overnight rate, central bank instruments, operational framework, averaging, reserve requirements.

Determinants of the size of a monetary policy committee: Theory and cross country evidence

Theoretical and empirical studies of different sciences suggest that an optimal committee consists of roughly 5-9 members, although it can swell mildly under specific circumstances. This paper develops a conceptual model in order to analyze the issue in case of monetary policy formulation. The number of monetary policy committee (MPC) size varies according to the size of the monetary zone and overall economic stability. Our conceptual model is backed up with econometric evidence using a 2006 survey of 85 countries. The survey is available for further research and published on the web. The MPC size of large monetary zones (EMU, USA, Japan) is close to the estimated optimal level, but there exist several smaller countries with too many or too few MPC members.Monetary policy.

Optimal monetary policy committee size: Theory and cross country evidence

Theoretical and empirical studies of different sciences suggest that an optimal committee consists of roughly 5-9 members, although it can swell mildly under specific circumstances. This paper develops a conceptual model in order to analyze the issue in case of monetary policy formulation. The optimal monetary policy committee (MPC) size varies according to the uncertainty of MPC members’ information influenced by the size of the monetary zone and overall economic stability. Our conceptual model is backed up with econometric evidence using a 2006 survey of 85 countries. The survey is available for further research and published on the web. The MPC size of large monetary zones (EMU, USA, Japan) is close to the estimated optimal level, but there exist several smaller countries with too many or too few MPC members.monetary policy committe, mpc size, decision making.

Coping with the speculative attack against the forint's band

On 15 and 16 January 2003, an intensive speculative attack was launched against the exchange rate band of the forint. This study analyses the monetary policy decisions with regard to the antecedents of the speculation, the events of the speculative episode and the subsequent period of consolidation. The study finds that the speculative attack was irrational and unjustified in view of several considerations. Through adjustments in the policy rate and the modification of monetary instruments, the MNB was able to defend the exchange rate band of the forint. The MNB successfully localized the effects of the speculative attack on the interbank market. The MNB’s presence on the foreign exchange market facilitated the rapid and controlled withdrawal of the speculative capital, without threatening the disinflation process and the stability of the financial system. The investors taking part in the speculation incurred substantial losses, while the market developments after the speculative episode increased the banking system’s profit.financial markets, speculative attack, exchange rate, speculative episode.

Changing central bank transparency in Central and Eastern Europe during the financial crisis

There is ample empirical evidence in the literature for the positive effect of central bank transparency on the economy. The main channel is that transparency reduces the uncertainty regarding future monetary policy and thereby it helps agents to make better investment, and saving decisions. In this paper, we document how the degree of transparency of central banks in Central and Eastern Europe has changed during periods of financial stress, and we argue that during the recent financial crisis central banks became less transparent. We investigate also how these changes affected the uncertainty in these economies, measured by the degree of disagreement across professional forecasters over the future short-term and long-term interest rates and also by their forecast accuracy

Changing central bank transparency in Central and Eastern Europe during the financial crisis

There is ample empirical evidence in the literature for the positive effect of central bank transparency on the economy. The main channel is that transparency reduces the uncertainty regarding future monetary policy and thereby it helps agents to make better investment, and saving decisions. In this paper, we document how the degree of transparency of central banks in Central and Eastern Europe has changed during periods of financial stress, and we argue that during the recent financial crisis central banks became less transparent. We investigate also how these changes affected the uncertainty in these economies, measured by the degree of disagreement across professional forecasters over the future short-term and long-term interest rates and also by their forecast accuracy

Environmental ranking of European industrial facilities by toxicity and global warming potentials

Abstract We present a methodology to develop the integrated toxicity and climate change risk assessment of Europe based facilities, industries and regions. There is an increasingly important need for large scale sustainability measurement solutions for company reporting with high granularity. In this paper we measure key aspects of Sustainable Development Goals in terms of human, cancer and non-cancer toxicity, ecotoxicity together with global warming impact potentials from point source pollutant releases of more than 10,000 companies and their 33,000 facilities in Europe from 2001 to 2017, by using the European Pollutant Release and Transfer Register. For our assessment, we deploy a scientific consensus model, USEtox for characterizing human and ecotoxicological impacts of chemicals and the global warming potential values from the Intergovernmental Panel on Climate Change. We discuss water and air emissions of dozens of pollutants in urban, rural, coastal and inland areas. Companies in the electricity production sector are estimated to have the largest human toxicity impact potential (46% of total) and the largest global warming impact potential (50%), while companies in the sewerage sector have the largest ecotoxicity impact potential (50%). In the overall economy, the correlation between facilities’ global warming and toxicity impact potentials is positive, however, not very strong. Therefore, we argue that carbon footprint of industrial organizations can be only used as a climate change risk indicator, but not as an overall environmental performance indicator. We confirm impact potentials of major pollutants in previous research papers (Hg accounting for 76% of the total human toxicity and Zn accounting for 68% of total ecotoxicity), although we draw the attention to the limitations of USEtox in case of metals. From 2001 to 2017 total human toxicity dropped by 28%, although the downward trend reversed in 2016. Ecotoxicity and global warming impact potentials remained unchanged in the same period. Finally, we show that the European pollutant release monitoring data quality could be further improved, as only three quarters of the toxic releases are measured in the Member States of the European Union, and a high share of toxic pollutant releases are only estimated in some countries. Of the measured or calculated toxic releases, only one third is reported according to the most robust CEN/ISO standards and about one fifth according to the least preferred other methods, like engineering judgements

Optimal Monetary Policy Committee Size: Theory and Cross Country Evidence

Theoretical and empirical studies of different sciences suggest that an optimal committee consists of roughly 5-9 members, although it can swell mildly under specific circumstances. This paper develops a conceptual model in order to analyze the issue in case of monetary policy formulation. The optimal monetary policy committee (MPC) size varies according to the uncertainty of MPC members’ information influenced by the size of the monetary zone and overall economic stability. Our conceptual model is backed up with econometric evidence using a survey of 85 countries. The MPC size of large monetary zones (EMU, USA, Japan) is close to the estimated optimal level, but there exist several smaller countries with too many or too few MPC members.