Category Archives: Currency

Eliminating high denomination notes and making the mob miserable

Ronnie Driver

Economists usually talk about money serving three functions – a medium of exchange, a store of value, and a unit of account.  But the ability to make payments using commercial bank deposits, which account for the vast majority of money, has already divorced the physicality of notes from the concept of the medium of exchange. Inflation and non-remuneration renders physical money a poor store of value.  And the unit of account does not rely on physical cash.  So is there a specific role for physical paper money anymore?

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Filed under Currency, Economic History

Central Bank Digital Currency: DLT, or not DLT? That is the question

Simon Scorer

The topics of central bank digital currency (CBDC) and distributed ledger technology (DLT) are often implicitly linked. The genesis of recent interest in CBDC was the emergence of private digital currencies, like Bitcoin, which often leads to certain assumptions about the way a CBDC might be implemented – i.e. that it would also need to use a form of blockchain or DLT. But would a CBDC really need to use DLT? In this post I explain that it may not be necessary to use DLT for a CBDC, but I also consider some of the reasons why it could still be desirable.

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Filed under Banking, Currency, Market Infrastructure

Bitesize: Bank note-able growth

Cordelia Kafetz

Despite speculation to the contrary, the number of banknotes in circulation is increasing. During 2016, growth in the value of Bank of England notes was 10%, double its average growth rate over the past decade.

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Big Data jigsaws for Central Banks – the impact of the Swiss franc de-pegging

Olga Cielinska, Andreas Joseph, Ujwal Shreyas, John Tanner and Michalis Vasios

The Bank of England has now access to transaction-level data in over-the-counter derivatives (OTCD) markets which have been identified to lie at the centre of the Global Financial Crisis (GFC) 2007-2009. With tens of millions of daily transactions, these data catapult central banks and regulators into the realm of big data.  In our recent Financial Stability Paper, we investigate the impact of the de-pegging in the euro-Swiss franc (EURCHF) market by the Swiss National Bank (SNB) in the morning of 15 January 2015. We reconstruct detailed trading and exposure networks between counterparties and show how these can be used to understand unprecedented intraday price movements, changing liquidity conditions and increased levels of market fragmentation over a longer period.

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Filed under Currency, Financial Stability, Market Infrastructure, New Methodologies

Bitesize: Periodicity of GBP/USD trading activities

Jihyoung Yi.

FX assets are traded continuously across the globe.  The majority of GBP/USD trades, however, are executed during typical trading hours in London and New York (NY). Saravelos and Grover (2016) find that: (i) FX moves during these hours are most highly correlated to the overall daily move; and (ii) there is statistically significant periodicity where GBP tends to depreciate in the London morning and appreciate in the NY afternoon against the US dollar.

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Filed under Bitesize, Currency, Financial Markets, Financial Stability

Central bank digital currency: the end of monetary policy as we know it?

Marilyne Tolle.

Central banks (CBs) have long issued paper currency. The development of Bitcoin and other private digital currencies has provided them with the technological means to issue their own digital currency. But should they?

Addressing this question is part of the Bank’s Research Agenda. In this post I sketch out how a CB digital currency – call it CBcoin – might affect the monetary and banking systems – setting aside other important and complex systemic implications that range from prudential regulation and financial stability to technology, operational and financial conduct.

I argue that taken to its most extreme conclusion, CBcoin issuance could have far-reaching consequences for commercial and central banking – divorcing payments from private bank deposits and even putting an end to banks’ ability to create money. By redefining the architecture of payment systems, CBcoin could thus challenge fractional reserve banking and reshape the conduct of monetary policy.

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Filed under Banking, Currency, Monetary Policy

Friedman was right: flexible exchange rates do help external rebalancing

Fernando Eguren-Martin.

Do exchange rate regimes matter for the formation of countries’ external imbalances? Economists have thought so for over sixty years, and policymakers have made countless recommendations based on that presumption. But this had not been tested empirically until very recently, so it remained an opinion rather than a fact.  In this post I show that having a flexible exchange rate regime leads to the correction of external imbalances in developing countries, offering some empirical support to a widely held belief. In contrast, this does not seem to be the case for advanced economies.

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Filed under Currency, International Economics, Macroeconomics

What explains the fall in sterling corporate bond issuance?

David Elliott and Menno Middeldorp.

Sterling could be falling out of favour when companies choose which currency to borrow when issuing bonds. Annual gross sterling issuance has almost halved since 2012, and sterling’s share of global issuance in 2015 was the lowest on record. According to those active in the sterling corporate bond market, some of the reasons for this decline are structural. These include changes in the investor base, annuities reform, and competition from the euro corporate bond market. These changes to the demand for sterling corporate bonds imply higher costs of bond issuance. Firms with limited access to foreign currency bond markets, such as small UK-focussed firms, or those with a lower credit rating, may face higher borrowing costs as a result.

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Filed under Currency, Financial Markets

Is sterling ever a fashionable currency?

Jihyoung Yi.

Despite the fact that the US dollar and the euro are the most traded currencies in terms of shares of average daily turnover (2013, BIS), my analysis suggests that foreign exchange rate (FX) market trends are usually driven by other currencies.  Most notably, ‘commodity’ currencies (such as the Australian dollar and Mexican peso) and ‘carry-trade’ currencies (such as the Swiss franc and Japanese yen) tend to be the main drivers. In contrast, sterling typically does not often drive currency movements – FX strategists often consider that it is rare for sterling to be ‘the story’ amongst the speculative community in the FX market.  But this is not always the case.  This blog post zooms in on a selection of sub-periods to show when particular currencies, including sterling, became ‘focal’.

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Filed under Currency, Financial Markets, New Methodologies

How important are interest rates for exchange rates?

Fernando Eguren-Martin and Karen Mayhew.

Many would say that when domestic interest rates rise (relative to abroad) the domestic currency will appreciate. But is it right to think like this? In this blog we use exchange rate theory to inform this discussion and to assess the importance of relative interest rates in accounting for past exchange rate moves. We find that relative interest rates typically move in the same direction as exchange rates but most of the time they account for a small share of exchange rate variation. However, academics might question our use of such a theory as its failure to forecast exchange rates is well documented. We show that this is somewhat unfair, as even if the framework is not very useful in terms of forecasting it is still a useful tool for decomposing past moves in exchange rates.

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Filed under Currency, Financial Markets