Jumpstarting an International Currency

This paper asks how a currency achieves international status — moving from zero to positive cross-border use — and whether deliberate central bank policy can accelerate that transition. The authors focus on the People’s Bank of China (PBoC) swap lines signed between 2009 and 2018, which extended RMB-denominated lender-of-last-resort credit to foreign central banks for the stated purpose of supporting RMB-denominated trade finance and settlement.

The empirical analysis combines two datasets. The first covers every RMB swap line agreement the PBoC signed with a foreign central bank (38 countries by 2018), compiled from PBoC news releases and validated against counterparty communications, treated as a staggered binary absorbing treatment. The second is monthly SWIFT data on cross-border payment message values (October 2010 – October 2018), disaggregated by currency and message type (payment orders MT103/MT202 and trade-finance messages MT400/MT700). The working sample, after excluding financial centre hubs, sanctioned countries, pre-sample treated countries, and small economies, covers 114 countries with 11,058 observations, of which 21 are treated during the sample period.

The Role of Automatic Stabilizers in the U.S. Business Cycle

This paper builds a quantitative business-cycle model that “merges the standard incomplete-markets model of consumption and inequality with the new Keynesian model of nominal rigidities and business cycles,” calibrated to U.S. tax-and-transfer data, in order to directly measure whether automatic fiscal stabilizers actually reduce the volatility of aggregate activity – rather than merely measuring, as most prior work did, how strongly taxes and transfers co-move with income. The authors define a “stabilization coefficient” as the proportional change in the ergodic variance of an aggregate when a given stabilizer is switched off, and use it to evaluate four theoretical channels: the conventional disposable-income channel, a marginal-incentives channel, a redistribution channel, and a social-insurance channel. They find that “the conventional argument that stabilizing disposable income will stabilize aggregate demand plays a negligible role in the dynamics of the business cycle,” since U.S. marginal tax rates barely change between booms and recessions, whereas “tax-and-transfer programs that affect inequality and social insurance can have a larger effect on aggregate volatility” – unemployment benefits and safety-net transfers meaningfully reduce output and hours volatility by redistributing toward households whose spending and labor-supply choices respond strongly, and by reducing the precautionary saving that idiosyncratic unemployment risk induces. Even so, “as currently designed, the set of stabilizers in place in the U.S. has had little effect on the volatility of aggregate output fluctuations,” largely because monetary policy under a near-optimal rule already does most of the stabilization work, leaving little residual role for fiscal channels; the automatic stabilizers become considerably more important when monetary policy is far from optimal or constrained, as at the zero lower bound. Finally, while removing the stabilizers would substantially lower utilitarian welfare, the paper shows this loss is due almost entirely to the redistribution and social insurance the stabilizers provide, not to any change in the amplitude of the business cycle itself.

Ricardo Reis | Macro Paper Warehouse

Jumpstarting an International Currency

The Role of Automatic Stabilizers in the U.S. Business Cycle