Éric Monnet

Establishing a Ukrainian Development Bank is key to Ukraine’s post-war recovery, to foster both international trust and local ownership. This column describes how, drawing on lessons from the European national development banks and Ukraine’s recent reforms, a Ukrainian Development Bank could integrate existing financial structures, channel EU aid, support small and medium-sized enterprises, and drive economic modernisation. Balancing local ownership with robust governance and civil oversight to mitigate corruption risks will be crucial to ensure effective integration into the EU and sustainable development.

We study how central banks have used their balance sheet to absorb international monetary shocks since the late 19th century, thereby regaining some monetary policy autonomy in a context of financial openness. If the uncovered interest rate parity does not hold, an increase in the leading international interest rate may push up domestic interest rates in both fixed and floating exchange rate regimes. Central banks can partially insulate domestic short-term interest rates from this increase by expanding domestic assets. With a fixed exchange rate, this is in addition to the sterilization of foreign exchange interventions. Accounting for the response of central bank balance sheets to an exogenous international shock sheds light on some puzzling behavior of interest rates and exchange rates across international monetary regimes in history. This study is based on a new monthly dataset of central bank balance sheets, macroeconomic, and financial variables for 23 countries since 1891.

New data covering 23 countries reveal that banking crises of the Great Depression coincided with a sharp international increase in deposits at savings institutions and life insurance. Deposits fled from commercial banks to alternative forms of savings. This fueled a credit crunch since other institutions did not replace bank lending. While asset prices fell, savings held in savings institutions and life insurance companies increased as a share of GDP and in real terms. These findings provide new explanations for the fall in credit and aggregate demand in the 1930s. They illustrate the need to consider nonbank financial institutions when studying banking crises.

It is widely assumed that the renminbi (RMB) cannot acquire a meaningful place in central bank reserve portfolios without full liberalization of China’s capital account. We argue that the RMB can in fact develop into an international reserve currency in the absence of capital‐account convertibility. Trade and investment links can drive use despite limited access to Chinese financial markets. But this route to currency internationalization requires policy support. China must provide access to RMB through loans and the People’s Bank of China (PBoC) currency swaps. It must ensure the convertibility of RMB into US dollars in offshore markets. It must provide RMB services at a stable and predictable price. Currency internationalization without full capital‐account liberalization thus requires the RMB to be backed by dollar reserves, which the PBoC consequently will continue to hold and use. Hence, we do not foresee RMB internationalization as supplanting dollar dominance.

I provide comments and replies to the seven insightful contributions that discussed “The Democratic Challenge of Central Bank Credit Policies” and the proposal for a European Credit Council. I review how interdisciplinary scholarship on the political economy of central banking have shown the limits of simple principal-agent framework applied to central bank power and legitimacy. I emphasize why a change to central bank independence is not necessary for a fundamental change in the financial system and credit policies. I also argue that deliberations can have strong effects on decision-making and that the power of the people is not restricted to the legislative power.

Using newly collected data at the city level between 1910 and 1938, this article shows that, after World War I, France experienced an unprecedented expansion in bank branches mostly due to the creation of temporary branches in rural areas. The banking crisis in early 1930s paused this expansion. Nevertheless, the number of bank branches per capita remained four times higher than before the war. Also, the expansion of bank branches was not associated with an increase in the ratio of bank assets to national income. These findings re-evaluate the Great Reversal hypothesis in banking and reveal the disconnection between geographical expansion of banks and standard measures of financial development. Both trends can be reconciled if one considers that banks are multi-product firms-not just lenders-and that competition for new customers is not always associated with greater credit activity.

Advanced-economy central banks are currently experiencing losses. To examine how rate-tightening cycles affect central bank finances, we study the financial statements of ten advanced-economy central banks during the 1970s and 1980s, the most notable and comparable policy environment to the present. We find that central bank profits actually increased in response to the anti-inflationary measures of the 1980s. We thus discuss how central bank profits depend on their policy instruments as well as their balance-sheet position when rate tightening begins, rather than on the tightening per se. Unlike today, central banks in the 1980s avoided losses because they did not remunerate bank reserves and their balance sheets did not carry the legacy of a decade of large asset purchases at low interest rates and long maturity. Our counterfactuals show that only a combination of these factors could have triggered losses in the 1980s: none of them is sufficient on its own. When losses emerged in the late 1970s, before the Volcker shock, they were due to foreign exchange reserves depreciating. In these instances, when central banks carried them forward and did not rely on transfers from the government, there was no loss of central bank independence or their ability to fight inflation.

Long considered suboptimal, capital controls and FX interventions are now recognized as prudential measures. Yet, whether they are used in combination remains an open question. Thanks to a rich dataset from 1950, we investigate how the response of FX reserves to an exogenous US monetary shock depends on capital controls. The response is insignificant with a very close capital account. By contrast, for a significant number of countries, FX reserves and capital controls are combined to tame the effects of an international financial shock. Yet, as countries open up financially, FX reserves replace capital controls. There is no one-sizes-fits-all recipe.