 Maybe we can start immediately the session. Just briefly to use the speakers and the discussant. We'll have one and a half hour split in two papers, two excellent papers. Actually, the first paper will be on safe assets scarcity and monetary policy transmission. David Tomio from Darden School of Economics of Business, University of Virginia will be the presenter. And the discussant will be Stefan Young from Bundesbank. And the second paper will be, instead, presented by Ricardo Reis from LSE on the anatomy of a peg lessons from China's parallel currencies. And Costel Luisa understand that Costel Luisa is online, instead, and he's from Imperial College. So a dual of the game, 45 minutes each paper, 25 minutes presentation, 15 discussion, five general discussions. So I'll give you the floor immediately. Thanks, David. Thank you. Thank you, Carlo. So while my slides get up, thank you so much for having me. And thank you for including our paper in the program. We really appreciate it. And we really look forward to all of y'all's comments. And then, of course, the comments from our discussant, Stefan. So this paper is co-authored with Benoit and Miklosh. And luckily for me and for you, they're here in the audience. And they're the ECB and Buckingham France, respectively. So the usual disclaimers apply. Now, what we're going to be examining today is the following question. How does conventional monetary policy pass through to money markets when the assets used as collateral on these markets are scarce? Now, let me give you the context for the following question. The context is that following years of lose monetary policy, both conventional and unconventional, the ECB decided to raise interest rate in July 2022. And they decided to raise interest rate without or while still holding large balance sheet, while still holding on to a large quantity of sovereign bonds. That is, they decided to engage in raising interest rate before engaging in quantitative tightening. What we're going to ask about today is what is the consequences of this timing? Again, raising rates before selling assets on the pass through of conventional monetary policy to the money markets. The reason we're going to do this is because it has been established, both by some of the people in this room, that the asset scarcity to follow QE really impaired the functioning of people markets. Therefore, the question that we're going to ask today is the follow. Does a safe asset scarcity following QE impede the pass through of conventional monetary policy to money markets? Let me give you an idea of what we're talking about. So here I show the consequences of the increase, the rate hike, the increase in the DFR in July, 2022. So here to the left, you have the increase in DFR, the 50 business point. The next column is increase in Esther, which is an uncollateralized interbank rate between the week before and the week after the rate hike. Now you'll see that that increase in Esther is 49 business point. It's essentially there is almost the same as the DFR. The next three columns here tell you how collateralized rates, rates collateralized by year-wide Italian and German collateral bonds, German bonds as collateral, how they increase surrounding the rate hike, again week before to week after. You see they're significantly below this 50 business point increase in DFR. What we're gonna show you is that how far they are from that increase in DFR is actually gonna be a function of how scarce these assets are. I'm gonna also show you that this increase in scarcity that follows from this poor pass-through had an impact on the changes in the yields of the bond. The idea here is that bonds that were more scarce, they saw a worse pass-through, which means their specialist increases, as the special increases, their price increase, or don't decrease as much, which means their yield increase but did not increase as much as those yield of bonds which are not as scarce. All right, for the rest of the presentation, I'm gonna focus on the July 2022 rate hike. I'm gonna show you the results also hold for all of the 2022 rate hikes. And then if I have time, after my conclusion, I'll tell you a little bit about what happens if you extend your analysis all the way to the latest rate hike from last month. Now, we were not the first people to think about what's gonna happen to the transmission to money markets of a rate hike while these assets are scarce. Here's a few quotes from, for example, Bloomberg. Bloomberg mentions how lagging repo rates risks undermining the ECB latest tightening push. Financial Times speaks about how the Eurozone repo money markets have become dysfunctional and threaten the ability of the central bank to push monetary policies. Centralbanking.com makes a connection we also make about the between scarcity and the pass-through, saying that a lack of high quality collateral in the Eurozone resulting in the money market rates lagging the ECB policy rates, therefore preventing adequate policy transmission as policy rate rises. Most importantly, here's an extract from a speech by Isabel Shambo. Isabel said the Euro system outright holding of the Euro-Area sovereign bonds currently amount to more than a third of the standing market, this idea of scarcity. As a result, the scarcity premium that markets participant must pay to obtain this asset have been considerable both in the repo and the bond market. Such as scarcity can delay or even impair the transmission of monetary policy and implies that sovereign yields in the Euro area, largest economy, remain more accommodative than intending our policy stance and that's exactly what we're gonna show to you today. So I'm gonna show you our results in four points, in four graphs, because I find that easier. And so the first result we're gonna show you is that surrounding the rate hike of July 2022, bonds that were more special, they saw the repo transaction, a transaction that were collateralized by this special bonds increase by less compared to the same increase in repo rate collateralized by bonds that were less special. And so here you have on the X-axis how special the bonds were prior to the rate hike and on the X-axis, on the Y-axis, the change in repo rate the week before to the week after the rate hike. And you see that there's a very negative relationship, clearly represented in the data. The second point, I'm gonna take this lack of pass through and I'm gonna link it to the value of the bonds, the prices of the bonds. So here you have the specialist of bonds prior to the rate hike on the X-axis, on the Y-axis you have the increase in net asset swaps. So what this means is that bonds that were more specials before the rate hike, they experienced an increase in net asset swaps that were smaller compared to bonds that were less special. That means that these bonds, the prices for the bonds decreased by less, prices of very special bonds decreased by less, which means that their yields increased by less compared to bonds which are not special that saw a larger increase in yield surrounding the rate hike. Finally, I'm gonna connect the, how much the central bank's QE efforts had made this asset scarce. So here you have on the X-axis, the fraction of bonds rescaled, that was held by the central bank as of December, 2021. And on the Y-axis you have the pass through, again to money market rates surrounding the July 2022 rate hike and you see a clear negative relationship, all right? So I am linking the scarcity of false QE to the pass through, to the yield of this bonds, just aligned with really Isabel Schnabel's interpretation or narrative. Finally, I'm gonna show you that as there is a heterogeneity in the way that this repo rates changes, this heterogeneity is actually going to be reflected in the heterogeneity and the changes of funding cost of market participant. So what we show here is we calculate how would the funding rate, the funding cost of banks if they were to lend out their bonds, change from before the rate hike to after the rate hike. And we'll call the distribution here. If all of their funding costs in the collateralized market change by exactly 50 business point, all the mass will be around zero, whereas we show that there's a larger heterogeneity. So you'll have some banks for which the banks here near the zero for which when the deposit facility rate increases by 50 business point, their collateralized cost also increases by 50 business point. Whereas there are other banks down here that mass there for which when the DFI increases by 50 business point, their collateralized rate only increased by 30 business point. And so we're gonna make an argument that this might have indeed an impact on the real economy. All right. So before I show you the analysis in detail, let me give you a little bit of a summary of what we find. So the first question we ask is does safe assets scarcely reduce the pass through of rate hikes to money market rates? And we show that, yes indeed, pass through to money market rates is impeded in a way that is inversely proportional to special source currency. The second question we're gonna ask is does the QE efforts of the central bank have any bearing of this lack of pass through? I'm gonna show, yes, that's the case, repo for bonds that were purchased more during QE, they show less in pass through. We're gonna make an argument that the mechanism behind this is really who holds this bond and whether they participate and they pledge this bond on the repo market. Finally, I'm gonna tell you about the connection between this pass through, the impaired transmission of money market rates, the relation between this impaired transmission and bond prices. And I'm gonna tell you how different investors are heterogeneously impacted. All right. So that's broadly what we're gonna show today. So before we get into the details, I wanna make sure they were all speaking the same language. Here by specialists, I mean the difference between the deposit facility rate and the repo rate at which a bond trades on the repo market. And what I wanna show you is just how prevalent this specialist's scarcity was on the repo market. Here you see the average special repo rate for the average Italian and German government bonds. And what you see here is that during, right around the first rate hike in July, 2022, this is when specialists really was at its highest in all the sample that we consider. It was as high as 20 business point for the average Italian bond and more than 40 business point for the average German bond. And this was not driven by a few outliers. This is the fraction of bonds that were trading 10 business point below DFR or more. The fraction of bonds issued by Italian Germany and at the time of the July rate hike, more than 80% of both Italian and German bonds are actually trading on special. So this was quite a spread, a wide problem in the bond market. All right. So why do we think of repo markets when we wanna talk about monetary policy transmission? Well, it is the largest segment of the money market. So transaction in collateralized transaction really dwarf the amount of volume in the unsecured segment of the money market. I'm gonna focus on special transaction which now make up more than two thirds of all repo transaction, the other third being GC transactions. And of course, this rates have an impact on the prices and the yield of these bonds. And so we really do think that the password to money market has an impact on potentially or monetary policy transmission. All right. So this is what I'm gonna tell you today. Data empirical setup. I'm gonna show you the results, talk a little bit about the channels that we have in mind, tell you about the broad pass through, the funding cost, heterogeneity consequences of this and then conclude. And then hopefully I'll have a few minutes because what I wanna do is we actually managed to extend all of our analysis to cover all the way until 2023. And so I at least wanna show you what happened in 2023 considering all 10 rate hikes since July 22. So quickly on the data, we use regulatory data from the ECB, money market is reporting that tells us fully identified repo transaction data, throw in some broker tech and MTS information to figure out what prices we use holding data statistics to see exactly what is the portfolio held by the ECB, what is the portfolio held by bank groups and what is the portfolio held by other investor at the investor country level. In terms of the transaction we consider we look at one day maturity repos which are spot next which is by far the most traded tenor. And we only consider in repo which are collateralized by bonds issued by treasury bonds issued by Germany, France, Italy and Spain. We define specialness as I mentioned and when we talk about pass through we think of the difference between repo rates five days before to five days after the rate hike and when I say pre-hike specialness again I mean the average of specialness in the five business days before the rate hike. With that out of the way let me give you a little bit of at least an unconditional sort of picture of what happens to specialness around the rate hike. So here you see the average specialness before and after the rate hike, the average repo rate before and after rate hike and therefore the pass through. So the average bond was trading 68 business point minus 68 business point repo rate after the rate hike it was minus 24 business point for pass through of 43 business point significantly lower than the 50 business point that was in place in the DFR. This is how it changes by country and really what we wanna focus about is pointing out and demonstrating how that difference is going to be a function of scarcity and a function of specialness. So this result of the lack of pass through that was impeded pass through surrounding rate hike is not just true for the first July 22 rate hike but when we put all of the 250 business point change in the DFR the results still hold. Still again the idea that the pass through to the money market rates repo rates was not perfect even if we take all of the rate hikes of 2022. All right so what I'm gonna show you now is the relationship between the pass through to the money market and the specialness of this bond. So what I'm going to do is I'm going to look at the pass through for bond I and regress that on the specialness before the rate hike for a set of the bonds I mentioned earlier. You have the just scatter plot relationship to the bottom left here and the regression relationship to the bottom right and you see that there is a very clearly negative statistically significant relationship between pre-hike specialness and the pass through. Again the pass through is generally below 50 business point so it was impeded and it was impeded along a very specific dimension. Bonds that were more special they experienced a much worse pass through compared to bonds that were less special. So that's our first result and it just again as I mentioned earlier it just doesn't hold for the July rate hike. It holds the same result which is that there was a positive change in specialness based on how special a bond was before the rate hike. It holds for all of the hikes of 2022. So if you believe what I just told you that the pass through was negatively correlated with specialness and if you have read Iman's Benoit's and Miklash's paper or my paper on topic or actually Stefan's paper on topic for that matter you will know that specialists in the Ripple market really was increased as a consequence of the scarcity created by the purchases by the central bank during QE. And so it would be reasonable to link the pass through that we observe not only to specialists but really to how much each single of these bonds had been bought by the central bank during its QE efforts. And so this really creates in my head a nice tension in this regression between conventional monetary policy and unconventional monetary policy effectiveness. So the regression I'm gonna run is the following in reduced form. We're gonna regress the pass through around the July 2022 rate hike on how much the fraction of the bond, how much a bond had been bought by the central bank during QE. Meaning we're gonna look at a changing rate okay in July 2022. We're gonna regress it on how much the bond was had been held by the central bank as of December of the previous year and we're gonna show that that's negatively related and significantly related. We can think about it as a reduced form regression or more of an instrument regression meaning the causality here going from the share held as central bank to specialists and then from specialists to the pass through. And so this is what I show in this regression here that there is a statistically significant negative relationship between just how scarce a bond had been made by the central bank during QE and how and the change in repo rates for transaction collateralized by that bond around the July 2022 rate hike. All right and this is just in graphical forms. Now if you buy all of what I had to say so far you might ask the following. But does this lack of pass through the repo market actually translate to a sluggish pass through to the yield of this bonds to the cash market? And I'm gonna show you indeed that that is the case. And I also think okay what could the central bank do to improve the pass through and we're gonna have a couple of words on this in our conclusions. So to understand how this lack of pass through impacted bond yields we do the following. We regress the change in bond yields so around the July 2022 rate hike on how special a bond was before the rate hike and we find that that is very significant. To give you an idea of the magnitude for every 10 basis point of specialness of a bond prior to the rate hike yields increase by two basis point less. So this is quite significant. Of course you might say there is a million other thing that affect in that how yields changing on a rate hike and we agree so to this regression we add duration and convexity of the bond and showed a specialist still very significant in terms of the yield you know there could be you know credit risk component going on and so we include counter fixed effect we include maturity fixed effect we include maturity by counter fixed effect we really try to absorb all possible variation that is not coming from how scarce and how scarce a bond is and how valuable it is as collateral and we still find that there is a very clear relationship between specialists before the rate hike and the change in yields. Did you know the channel here of the chain of arguments here is the following. A bond that has a larger specialist before the rate hike it will experience a smaller or worse pass-through which means that their specialist will increase which means that there's more special dividend connected to this bond which means that this bond will command a higher price or lower yields or alternatively that this bonds yield will increase by less around a rate hike. Now you might still not be happy with our regressions here because we're not controlling for everything the proper way and so what we do is the following we calculate asset swap spreads for each bond so this really measure how much of the value of the bond comes from its value as collateral not from it exposure to interest rate not from it exposure to credit risk and we show this we then subtract the proper tenor CDS from this asset swap to really get to the point about how much of this asset how much of the value of this asset comes from its value as collateral and we show here the relationship for the average German bond between asset swap spread net of CDS the red dots and the blue dots that is specialist so these two measures really go hand in hand so the specialists on the repo market and the pricing on the cash market are tightly related and so our results will then appear evident now that is the bottom right graph here so what this graph tells me is that bonds that were more special before the rate hike these bonds experience a much smaller change in that asset swap which means again that their prices decrease by less which means that their bond yields go up by less during around the rate hikes which really sort of in my idea in my head establishes the relationship between the QE driven scarcity specialist to the lack of password then an effect on yields just the way that I mentioned from Isabelle speeches later earlier so what is driving this results in our head what is driving the result is a heterogeneity in whose hold in this bonds meaning what we think is that bonds are on special they're more special they tend to be held by investors that are less likely to take advantage of the increased spassiness what do I mean when there's a rate hike this rate hike creates a profit opportunity for somebody who holds a bond that is very special the profit opportunity is the following you just land it on the repo market take the cash and then park it at the DFR all right some higher rates the more of this arbitrage you do the better the password should be and so what we suspect well suspected and then verified empirically is that bonds that experience a very poor password these are bonds that are not held by financially sophisticated investors that take advantage of this arbitrage opportunities and that's exactly what we show here so here we have on the y-axis again the pass-through surrounded the July 22 rate hike and on the x-axis we have how much of this bond was held prior to the rate hike by financially sophisticated institutions such as banks, insurance corporations and pensions and here we show indeed that the more a bond was held by this financially sophisticated investor the better the pass-through this bond experienced who's on the other side of the scale in terms of sophistication perhaps for an investor who are not as active on the repo market or maybe another investor is that doesn't necessarily lend its asset very actively such as the central bank so the results earlier regarding the central bank purchases is quite consistent with this narrative that we have in our head you might think that these results might be driven by for example, for example, bargaining power differential bargaining power between cash lender and cash borrowers these results are in the paper we actually ruled this out although it does explain some part of the variation of what we observe all right so now in the three minutes I have left I want to tell you about the pass-through the differential pass-through across different investors and just how long it took for this pass-through to eventually be perfect and the answer is very long first thing I want to show you again is we have this we run this kind of thought experiment if we were to look at the portfolios of all banks in the eurozone and we were to look at if they were to lend their bonds the week before and the week after the rate hike and we look at the difference about the rate they could have funded themselves at how much does this rate change around the rate hike if they change it by 50 business point which is a change in the FR you should see all of the mass around zero and we show that that is not the case indeed there is a significant difference between say this guy here this bank for which their funding cost increased by essentially 50 business point per 50 business point increase at the FR and it happens to be because they hold not very special bonds there's a large difference between what happens to that bank and what happened to a bank down here for which the funding cost when the FR goes up by 50 business point only increased by say 30 business point because they happen to be holding very special bonds now for this to in any way have any bearing on the real economy we should expect this not to be a flesh and the pen sort of event you see a scarcity specialist and then that goes away you know, eight days after the rate hike so here we calculate the pass through as time goes by still using five days windows but then moving the windows further and further away from the rate hike and what we show here is that this increased specialist of this lack of pass through does not resolve in any time soon it takes more than 40 days essentially by the time the next rate hike happens this the first one hasn't kind of lived hasn't hasn't over the increased scarcity of the first one hasn't disappeared yet last thing I want to tell you about our conclusions and then show you what happens in 2023 with the one minute I have left so I'm gonna conclude I'm gonna just summarize what I told you which is that this rate hikes where less than pass through two short term rates and the reason that is, is because of how scarce this assets were and that has a consequences on the prices of this bond what can the central bank do to ameliorate the situation where it can reduce its balance sheet which is exactly what I'm gonna show you in a second is what happened in 2023 or it can increase the availability of assets on the secure lending facility which also happened so I wanna show you in the 30 seconds I have left what happens if you move away from the 2022 world in 2023 so first of all the relationship between specialists before a hike and average pass through around this rate hike if anything becomes a lot more statistically strong when you consider all of the 10 rate hikes another what I think is a super cool result is what makes me excited is this discontinuity you see around 20 business point I actually found this discontinuity using this kind of endogenous threshold regressions that essentially select where you should split the sample to have the best explanatory power and what we show is it really happens at 20 business point why because at 20 business point that's when it makes sense for you as an investor to go to the central bank and to borrow the bond from the central bank using cash it's where there is this extra supply coming from the cash collateralized secure lending facility by the ECB as scarcity decrease in 2023 what we show that scarcity did decrease in 2023 and as scarcity decreased of course you should expect pass through to improve in 2023 and that's really what we show so here we show the pass through for the different rate hikes this is really what we should focus on in our paper in the current version at least and this is what happens after December 2023 2022 for the rate hikes in 2023 all right so why is that and it goes back to Philips slides here which is essentially there is an increase in supply coming from both an increase in issuances by the government and decrease in the euro system overall balance sheet therefore reducing scarcity entirely in line with our story okay thanks a lot and now we have the idea for the anatomy of a peg okay thank you okay see if that works though they're not quite ready for me anyway thank you for having me there we go about 14 years ago China undertook or China implemented a very large scale monetary experiment and that's what I'm going to talk to you about over the next 25 minutes that experiment is interesting because China is now on the road to be the largest economy in the world but it's also interesting because it's going to allow me to reevaluate some very fundamental principles of monetary economics namely the role of money in exchange rates what was that experiment or let me start with the motivation for that experiment in 2009 China having grown as a very large player in international trade markets still had a currency the yuan that was entirely domestic 2009 the PBOC said we want to internationalize the yuan you want to internationalize the yuan much like by the way in 1913 the Federal Reserve is founded with a goal of having the US dollar used outside of the US which was not in 1914 but the PBOC had a particular constraint in doing this in that it wanted to have both a free current account for after all this country is the largest trader in the world with millions of transactions every day across different goods different people, different destinations, different firms while at the same time having a closed capital account whereby I can't just go and buy some asset in China freely or invest in some factory there nor can a Chinese citizen just decide to buy some asset here in Frankfurt but rather for the most part the state is the one who decides where those investments are how can you achieve a free current account with a closed capital account in terms of freedom the answer of the Chinese authorities of the PBOC was to do a large-scale monetary experiment which was to create a parallel currency parallel currency existed before it was not an original idea but at this scale and with its features it was a quite remarkable experiment namely if you are a Chinese citizen I don't think maybe there's something in the audience who lives in Beijing right now or in Zhenzhen let's say and you make a payment with your card the currency you're using is the so-called CNY that currency works just like any standard currency with a money market whereby there's reserves of banks at the central bank in CNY there's a clearing mechanism, real-growth time settlement happens and that is the currency that is a Chinese you think about in 2009 what was created or it already existed some structure but really started was the parallel currency called the CNH big chunk of it in Hong Kong but some also in Singapore in London and other places CNH is a currency that if you're making a payment again with a debit card on a Hong Kong bank that is the currency that you have even though both of them are called the Yuan or in their banknote form the Remnibi where in CNH there is absolutely no limits in using it I can right now go to a bank in London, open a CNH account again a Yuan account is going to be a CNH account and I can pay not just for Chinese goods but also you or you or you I can pay anyone in CNH it is a free account and that is the account that is being used for payments to buy goods that are invoiced in Remnibi out of China or not CNH is a completely free currency in many ways CNY though can only be used by Chinese to a first approximation meaning if you want to invest in a domestic asset say in Chenjian then you need to have CNY and me as a non-Chinese citizen cannot easily get CNY in order to do that that is the capital account is closed because to either invest in China I need to use my CNH to get CNY, not easy and for a Chinese citizen who has CNY and wants to invest abroad he needs to get his hands into CNH, not easy why not easy? because converting CNH and CNY is where the controls really bite there are controls on foreign direct investment there are very heavy controls on my ability to stuff my pockets with banknotes, take the subway from Zhenzhen to Hong Kong and deposit in the bank there but more importantly there are very strict quotas there are strict controls in that a Chinese firm that sells a good to me who might pay then CNH can only change that CNH for CNY to pay its bills in China to pay its workers against showing the invoice that it made that sale to me that means that for instance large exporting firms in China all have a money market desk, a treasury desk like we used to have in banks but they have it in exporting firms all they do is have a stack of invoices and try to essentially arbitrage with CNH and CNY and move as you wish to do so likewise banks, Chinese banks that have operations in Hong Kong say and in Zhenzhen will have a limited ability to shift their deposits and reserves between the two imposed by the PBOC in terms of being able to control these follows of capital and so what you have is you have these two parallel currencies this is very not original but quite striking idea of let me try to impose capital controls by going to the root of our capital flows which is through the payment system through currency at some point you have to convert CNH to CNY in order to move your capital in or out of the country and so this is how you can achieve an enormous economy of a scale never seen is able to impose a capital control of some form so far so good this is how the Chinese impose capital controls problem, classic monetary problem if you have parallel currencies Gresham's law is going to come to bite meaning if I'm a Chinese citizen and you're and Carlo here is a Chinese citizen too and we live in Zhenzhen and have an account open in Hong Kong say an account open in Zhenzhen we have a debit card in CNH we have a debit card in CNY we can pay each other in one or the other and therefore bad money will drive good money out in other words the exchange of these two forms of currency has to be more or less one it can deviate from one the whole point of capital controls is that it can deviate from one I can't just simply use one versus the other because I have limited exchange of one for the other but if it deviates too much the capital controls will fall apart because I would come up with some ingenious way to stuff my pocket and be able to pay in one of the currency rather than the others as 300 years of monetary history teaches at least the PBOC has been extremely successful in that the exchange rate between CNH and CNY has deviated from parity by 20 basis points rarely more than 10 basis points in the last 5 years therefore we have here one of the most successful pegs in the history of certainly parallel currencies or foreign currencies and this paper is going to try to make sense of that peg or use this experiment to try to understand some principles of monetary economics how does the PBOC does this? it does so by controlling the stock of money in CNH now the way it does it if you go and try to read the very very little literature on this sounds very confusing, very complicated lots of funny different institutions going on but let me argue to you that actually it's fairly conventional let me start by reviewing to this audience probably unnecessary the conventional way in which we think about monetary policy operations if you want to expand the money supply the central bank increases reserves by buying government bonds from the commercial banking system that sells the government bonds and lowers the reserves then we have a money multiplier and so far as the increase in reserves is going to lead to an increase in loans an increase in demand deposits and multipliers that way leading to increase in money both in the narrow and in a somewhat broader sense now that is an open market operation actually many central banks don't do exactly this what they do instead is have central bank bills liabilities of some time and through repurchase or reverse repurchase operations what you do when you issue reserves that you buy back bills you had issued before same effect, reserves go up or you have a lending facility whereby the way you issue reserves is by lending money to the banks again this makes a difference in the commercial banking system but at the end reserves and deposits go up there are no CNH bonds on which to do open market operations but there are CNH bills and there are CNH lending facilities and this is how CNH works namely the complicated way in which the PBOC does this is that there is a set of offshore clearing banks they are the ones who issue CNH deposits the equivalent of CNH reserves are actually in the offshore banks the PBOC itself has no CNH reserves per se but these banks have CNY reserves against the CNH deposits and the PBOC does issue the only CNH thing in the PBOC is CNH bills therefore what the PBOC does is every week through auctions goes and buys back or issues the bills issued in CNH and by doing these auctions CNH bills and therefore buying them from say a commercial bank offshore a Hong Kong commercial bank achieves exactly the same way by using the offshore clearing banks including intermediaries and expansion of the money supply then daily or better even hourly or minutely the HKMA has a big stock of CNH deposits at the offshore clearing banks and what it does with those is that it uses a lending facility to the so-called primary liquidity providers in which it adjusts the quantity of M every minute, every hour well not every minute but every hour to try and keep the peg in line as well and so ultimately throughout in spite of all the complications it's really conventional monetary policy so with that in mind understand that this is somewhat conventional or unconventional clothes of what is a conventional animal let me use this to test some to understand the spec and to understand something about monetary economics let me start with the most important condition in all of exchange rate theories today the UIP condition here applied to a bank a Chinese bank say or some bank that could either deposit in CNH deposit onshore and earn and return on reserves or deposit instead or hold a deposit in CNH that is the offshore amount and it will take into account the expected change in the exchange rate between CNH and CNY and without those files this would be the standard UIP condition that says note that it's a change in interest rates that will drive exchange rates expected appreciation appreciation but now imagine that money is special in that money provides some liquidity benefits and therefore that those liquidity benefits subtract from the pecuniary return on money if that is the case and increase in the supply of money and for fixed interest rates will tend to depreciate the currency there will be a monetary theory of exchange rates there will be liquidity effects on exchange rates testing this has been a great challenge in monetary economics why and what am I testing this I mean testing the idea that money is a pure financial asset there's no such thing as a fai the demand for money is horizontal that if you want UIP holds without liquidity effects as we tend to teach it the reason why it's very hard to test this is that one whenever changes in money supply happen usually they come with changes in the interest rate indeed that's the way for instance DCB does it sets interest rates in money adjusts so you can't really test M independently or R it's very hard because the foreign guys they're also changing their quantity of money and interest rate so how can you distinguish the effective and M on the exchange rate it's very hard because monetary policy keeps on doing things that responds and singles to markets so expectations are going to be moving around as you're trying to do the effective M on E well for this very peculiar but in some ways traditional monetary world in Hong Kong and China what we have is that one CNH reserves are not remunerated so there's no change in the interest rate two the PBOC's onshore policy is not driven by what's going on in Hong Kong and so the onshore policy is not moving around and three the monetary policy rule is very clear it's keeping the parity peg between these two so I know what that rule is so I have a chance of getting this thing of being able to test what's the actual causal effect of money on exchange rates in a way that has turned out to be a huge challenge for monetary economists for many decades what do I need now though I need some exogenous changes in M in order to see whether E moves around and luckily I have those changes in M because in 2018 when the PBOC started issuing those bills initiated a plan to have 40 billion of three month bills and 10 million of 12 month bills and it was heading towards it but in August of 2019 and then later in November of 2020 because of changes to the money markets people in this room but they're equivalent in Hong Kong and Xinjiang and other places said well we want to change this we're going to change the composition of how many three month, six month and 12 month as well as we need to have a little bit more than the 40 billion we need to go up to 40 billion of these bills to then conduct a monetary operations but because there are weekly auctions of the three month, six month and 12 month in not the same week there's one week is the three and the six month the next week is the 12 month and others by changing the composition what the PBOC did was to me a researcher do an amazing thing it created nine completely exogenous big contractions in the money supply or expansions in the money supply because the three month bill would expire it was going to be replaced by a 12 month bill one week or two weeks later and therefore I had two, three percent falls increases in the money supply by contractions in the bills on account of this we have exogenous money supply shocks extremely rare and I can look how does the exchange rate respond to it here's what it should respond to a placebo lo and behold you print money the exchange rate falls monetarism is alive and well printing M lower Z for a fixed interest rate the elasticity implicit here of the exchange rate on M is 0.09 which is very assuring because the extensive but very difficult literature trying to estimate elasticities of money demand a standard to finalize the money demand between 0.05 and 0.13 and so I'm finding a number consistent with a completely different literature that regresses instead broad measures of money on interbank rates and finds elasticities with the verification strategies of trying to get there second question and the one that leads to in some ways the title of this paper is let me go further and ask a different monitor's question which is can you choose M to keep E-pegged to keep the exchange rate pegged why? because money this little M that was the exogenous bit of the PBOC sorry this little M but there's endogenous supply of money by banks who create money in the form of deposits and how can you ever be trying to target M to E without failing inevitably once you have a banking sector creating money now in a model in which banks supply deposits you're gonna have an optimality condition of the type that says if the bank earns some return let me normalize it to 1 in lending then it will create deposits to equate the return that lending to the return it pays on deposits if it's an offshore lending and an offshore you'll have the exchange rate but if money matters in the sense that liquidity matters the bank will realize that when it issues deposits it's gonna have to have money reserves M in order to back possible withdrawal shocks in order to manage that M there's gonna be a money multiplier M over D you need to if you increase D you're gonna have to hold a little more reserves there's gonna be an extra cost if you want issuing those deposits combining that with a demand for households for liquidity services standard that the higher you pay on deposits the more deposits the households apply you end up with again perhaps a very standard conclusion which is that if people want more C&H deposits the C&H exchange rate should appreciate now the PBC doesn't want that to happen and so what does that have to do? it would have to increase M to reestablish parity so the theory says this is how you respond to shocks to the creation of money by banks you respond by trying to print money on the other side or unprint it let me go now is that what the PBC is doing? is that how one of the most successful pegs in history is being maintained let me start by noting that if it's a standard result in optimal control theory that if you're trying to peg something then you won't achieve it perfectly but you will achieve such a deviation in the peg should be approximately bell shaped and symmetric which they are this is the Instagram of what I showed you before the deviations of that therefore what happens is that when there's an increase in demand for C&H the exchange rate is gonna appreciate the HKMA at a daily frequency is going to try to print money lend money out in order to bring the exchange rate down again it's going to fail inevitably at a daily frequency so the exchange is gonna move but if it's doing a good job this should be approximately bell shaped as it is so what I'm gonna do is say well I'm gonna use the change in the exchange rate in a day as a measure of money demands in that day and see where the HKMA not the PBOC because if you see it only acts a week later the HKMA the next day prints the M increase the liquidity facility in order to bring it back there will be a test of this mechanism now of course the HKMA responds in the same day as well and so I'll have a bias estimate an estimate that's attenuated because it won't have the response in the same day only the day after but luckily I have a great instrument which is that the day before whenever the yuan is depreciating relative to the US dollar because you need to go from C&Y to C&H to buy dollars there's gonna be a pressure for the C&H C&Y ban to to emerge therefore I can look at what's happening in the previous day on the control that the PBOC does on C&Y dollar exchange rate as an extremely powerful instrument with an F-stat of 20 20 or 40, I forget a big F-stat that becomes an instrument for the day before so I have day before what's happening in the dollar market affects what's gonna happen to the C&H C&Y exchange rate the next day which then I'm gonna see whether the HKMA the following day is doing the right thing and the answer is absolutely and you see that the IV is above the OLS as expected given the attenuation bias in other words how is this maintained by managing money, old style monitors you want to control the exchange rate you print money when it appreciates in this case the HKMA let me dig a little deeper though on these five liquidity costs, the desire of money we write a model for it in which banks suffer random withdrawal shocks of deposits they need to go into an interbank market they need to go and borrow if they suffer withdrawal shock in order to be able to meet their duties or their commitments if they can't find someone to borrow from they have to go to the HKMA to the discount window that it has then in that case liquidity costs are nothing but probability that you end up with liquidity deficit I got to withdraw if I got to withdraw then I either go to the interbank market I find someone there borrow from them at the interbank market rate or I don't and I have to go to the HKMA and borrow on the other side is that I may have enough deposits people may actually deposit in me end up with a surplus if I can find a borrower I'll make a profit in doing that the virtue of having this micro foundation it comes with three more predictions it says that look whenever I have this when I have going up whenever I have a positive demand shock for C&H I should see a tightness increasing the interbank market which means that which means that the interbank rate rises but also that if I'm holding on to my C&H and the C&H are valuable I don't want to go buy these bills the C&H bills so the demand for C&H bills should go down and moreover if this is happening insofar as the HKMA is responding satisfying doing the right thing the demand for the discount window should go down perhaps the more interesting one or the one in which the model reveals the HKMA wants to inject more M as it injects more M the supply of M through discount window should go down because if you have more regular M you don't need to go and get expensive M discount window M as opposed to lending facility M evidence indeed interbank the differentials go up you get a negative effect on how much people show up in the bill auctions and even though you're stressed, regular money gets printed expensive money gets less demanded, less use of the discount facility fourth and finally now as you know the PBOC manages the C&Y USD exchange rate it doesn't peg it at all it simply says we would like to control we would like to not have very large daily or weekly movements in this and the way it does so is by saying we're going to have some trading band that we don't want the dollar C&Y to move as I already explained to you and you can look at equations but if I need to go from C&Y to C&H to dollars and I worry a lot about the C&Y USD exchange rate then to the standard UIP condition now between the U1 and the dollar I have that it matters not only the interest rate differential and whatever UIP deviations as a standard but also if I let the C&H C&Y depreciate when the C&Y is supposed to be depreciating I can offset some of that if I let E fall below 1 E tilde doesn't have to fall below 1 I can use as a buffer to absorb some of the pressure the C&H C&Y exchange rate moreover I can use my liquidity control over these expected liquidity costs to potentially fight actively intervene in the dollar U1 exchange rate what that says is that if you have financial innovation think of Goodhart's law another classic point in monetarism that shifts 5 prime expected liquidity costs we should see C&H C&Y moving around but also that the PBOC or the HKMA or members trying to control the spec can in principle do liquidity policies to affect another exchange rate now an exchange rate with respect to the dollar the theory suggests that there's some tools to do this like discount window bill auctions but note that if I tighten the liquidity flows between C&H and C&Y I am affecting the exchange rate with the dollar so then final test and the one that doesn't have regressions because it's on recent events but has some pictures 2015 remarkable things happen in Hong Kong some of you may know I guess the money market conference many of you may know usually among macro seminars nobody knows this but the PBOC announced in the 11th of August 2015 that it was going to let the yuan depreciate when it let it depreciate what did you see exactly matching the theory I told you a slide ago C&H depreciated and blew the depreciate a lot more than C&Y a gap a relatively quite significant gap of 20 basis points emerge between the two that gap remained why because it kept on being pressure for the yuan to depreciate relative to the dollar the PBOC worried a lot about this why because capital controls came under pressure there was news of Bloomberg or whatever FT about what's going on in the Hong Kong market in a big time the peg is not going to hold what's the PBOC going to be able to do that what did the PBOC do massively tighten the liquidity controls the capital controls in being able to exchange C&H or C&Y a massive contraction in this when it did so it was able to close the gap the gap started rising and it did so a second time and again was able to close the gap which since then has done it all the regression I showed you before were after this period that's when this whole builds all monetary framework really was set up let's look at what the theory predicts if you massively contract the liquidity tightly I'm sorry the liquidity constraints the creation of money should really fall and it did money supply the pause by banks fell by 20 to 40% during this month in which the PBOC supposedly killed the Hong Kong market because it said she evaporated liquidity from the Hong Kong market through the liquidity controls 3 month interbank rates spiked massively a gap of 6-7% between C&H and C&Y we can look at the C&H C&Y comparison to understand this and as a result yes so and after that because the PBOC does all the reforms that I've explained to you we start having a much better framework to control it such that afterwards the C&H starts being less volatile and much less persistent more importantly C&H velocity then really rises and stabilizes to a point where velocity of C&H is roughly the same as dollar velocity C&H is a very efficient currency starting 2017 after some of the reforms so then 2023 comes along and what happens the yuan starts appreciating well to the dollar but now we have liquidity framework that I explained to you that should effectively keep the peg the same pressure emerges where the C&H starts trading below C&Y but now much less than before 5-10 basis points moreover the interbank rate spike much less than before by a couple of percentage points again you see the type of borrowing that you would see the printing of money by HKMA exactly as I told you it should happen to conclude the framework held up exactly as I showed you in this paper conclusion China has an offshore currency to enforce capital controls that's why it has I hope you learned 5 things how do they do capital controls they do it or China has two parallel currencies it does it by control that's the way in which it imposes capital controls and it allows us as monetary theorists if you want to see that exogenous increases in M the penalty of interest rates depreciated exchange rates that peaky bean pegs about control and supply of money that you can use now this liquidity wedge as a 4 FX intervention tool and that the liquidity framework in C&H is holding very well C&H could grow a lot C&H could become a much bigger currency where it has now because all the liquidity framework all the money markets in C&H exist and operate well thank you now we have Kosselouis it is online I guess and I will ask you actually to strictly adhere with the 15 minutes allocation because we are accumulating a lot of delay and I don't want to bite into the coffee break so Kosselouis do you hear me yes can you see those lights not yet we see you for now I am saving those lights okay let me add the slides again and you see the slides yes now we see that yes please can you see now that I moved the slides yeah so thanks a lot for the invitation to discuss this extremely interesting paper by Ricardo sorry not to be here but today at 4 pm I am moving from my apartment to another one in Holland Park so I have to be here in London so basically let me just summarize briefly the paper of Ricardo and Salih so basically there is as Ricardo said this is a large experiment monetary experiment which is important both for monetary economics and international economics in a sense you have a system in which you have to reconcile an open account which is fairly free and this is the biggest supporter in the world with a fairly close capital account with capital restrictions you know one the current account is giving you the yuan light to be used internationally because there is a lot of exports from China to the rest of the world but at the same time the capital controls on the yuan makes it to be domestically but not internationally but you need that you need like a currency in a sense to translate internationally for the exports so the Chinese answer has been to create an offshore currency which was initially in Hong Kong that's why it's the China's H of Hong Kong so the Hong Kong yuan that circulates in parallel with the onshore currency the normal yuan mainland China now the offshore one is completely free to use in payments and investments and just to put the numbers is around 2 trillion worth of transactions per day this is in yuan so this is around I guess is around 400 or 350 you know billions of dollars per day and is an important part of the global of the global trade since you have the capital controls in the yuan in the local yuan then you have to have some restrictions on the conversion between the onshore and the offshore yuan and vice versa so this is a very interesting setting and so Ricardo and Salih they use it to you know analyze this particular setting for two type of questions one is as Ricardo was saying at the beginning the Chinese economy is the largest also becoming the largest one in the world and so it's very interesting by itself independently of you know testing theories of monitoring international economies but at the same time the particular setting which I will come back and Ricardo spend time on that to you know test classical principles in monitoring international economies that lead money to a change rate and in that setting is the internal validity is so good that you can go and just draw lessons outside China so the results are you know four type of results the first one is that these exogenous unanticipated you know remember the picture that Ricardo put those exogenous unanticipated change in money they are affecting the change rate elasticity is relatively small but you know but is the monitoring principle that if there is more money then the effects should they proceed the second thing is how do you sustain these two these two currencies like what Ricardo was talking about the directs and law and it's just whenever there is an scarcity of for instance just to put an example on the Hong Kong of short then there will be an elastic supply of money for instance from the HKMA on the following days another thing and I will enter more into this last two points later in the discussion is that many times in some countries like potentially nowadays in the EU when there is an scarcity of a particular money like meaning public money then the private market will have an incentive if there is an scarcity and the effects is changing maybe you want to accommodate private money so that you know you get the in a sense you arbitrage that scarcity and then you would lose the say public money and the change rate correlation or causality in a sense and so the way the Chinese you know this is not only they have capital controls but they have liquidity controls that complement the capital controls and in that sense it can be successful to have these two parallel systems and then since the US dollar has been prominent you know even back in 2006 and 2005 and you have has been even in the 90s has been very prominent for the Chinese so they manage the you know they care about the effects with the US dollar they use the deviations of the onshore of short yuan in order to manage the you know the effects between the yuan and the dollar so this will be the basically the resource, the contribution and the setting the general comments I must say that this is an extremely important paper regarding the question, regarding the settings and the results I never say this and you should read the paper I mean I it's a paper in which you know there is a moment that they write if you are satisfied with this just go to the next session and skip these details of monetary operations but the monetary policy is extremely interesting for China and in general not just the economics on the full results and given that this conference is about money markets I encourage you to read the paper all the parts of the paper now as I said you know as they say and you know since China is becoming very interesting you can analyze and understand better these biggest largest economy in the world but the second thing is that is extremely good for identification purposes which is very important because sometimes you know, literature is plagued with identification problems and so the typical identification problems is that money reacts to economic activity and to exchange rates so is endogenous so here they got these bills, changing bills in particular moments many times, they are small stocks then many times exchange rates is a price so they might be a reverse causality to previous money there are many omitted variables like macro variables or macro values might be affecting both exchange rates and money and then endogenous monetary policy reacts and monetary policy rates interact not only money plays an important role so the key thing is that this institutional setting including the Chinese the policy tackling more local issues and the different instruments they allow the identification so since these are my general comments which are very positive I want to say a couple of four slides on some things maybe potentially to improve the paper like and I do this a lot on internal validity and I also always have the issue of external validity so this applies to my research but you know there is a tension between internal and external validity in the sense that this is a setting which is very good for identification but this is a setting in which there is the capital controls there is the equity controls key private players are subsidiaries of Chinese state-owned banks then both the I don't know whether the HKMA but banks and Hong Kong is heavily influenced by China and Chinese policies so you have two systems with two systems with in the sense that one might control kind of both an important point that I wanted to make is that and here I want to ask more Ricardo and maybe they could expand a bit more in the paper that it seems that there are not so many close substitutes you know offshore yuan such as given that this conference is about money market like for instance RIPOS RIPOS would be for instance in 2006 and 2005 would be private liquid safe assets with similar maturity to money so they are very close to substitutes to money and that part of the paper is about deposits but they have strong limitations on that so in a sense if there is scarcity of money in the United States of Europe class substitutes can jump in but maybe in Hong Kong there are not all these potentially substitutes in the sense that the type of assets are limited plus there is the restrictions on liquidity management now a question in a sense is not so much a question but something that they could improve is so they have these two parts. China is very important you are analyzing this, very nice and at the same time you have four very general results for a monetary ergonomics and international economics do you put the same emphasis on both is it one more important than the other and to me what it will be very nice in addition to highlight the Chinese particular setting as a unique place for identification but it's not so much affecting the standard validity on the results and I think that you can improve on this and be more persuasive on this. Just let me just put you an example for instance when you don't have high hyperinflation and you have relatively low inflation there is no relation in empirical studies between money and effects and a question is it just because the empirical literature is plagued with identification problems like the ones that I was telling you before in those innate omitted variables reverse causality or is it the case that in some settings is much easier and is much less related to expand the private money or private safe assets which are very liquid and therefore these they break the relationship between money and effects. So what are the two are the answers and in order so much suggestions could be whether you could exploit a bit more so one way to exploit is whether there are time-varying regulations like for instance on the 2016 sharks or other ones in the creation of private money at the time of scarcity of the onshore one. Another way is the offshore centres are in Hong Kong and the H means from Hong Kong but there are now other ones like London Singapore Luxembourg so maybe in these places in some periods is much easier to provide private money in case of scarcity of public money and whenever there are deviations on effects you can arbitrage them and if there is scarcity you can provide that scarcity and this might be easier in some offshore centres than others and on other times. With these you could in a sense shock the kind of liquidity regulation and the kind of also depending on the offshore centre and then tackle this question whether is it just purely that you have a better identification setting or is just more related to the to the substitutes of money. The final three slides I mean I found this explanation is very interesting so on the Chinese central bank and also these are if I understand correctly these are Chinese state subsidiaries for the offshore they do more on the liability things either more longer like bills or more shorter like research deposits. So a question that I have is whether they also directly intervene the central bank of China directly intervene in the FX market and in particular the Chinese, the Yuan, the Omshor Yuan. And why I'm saying this because potentially they could do it not only the HKMA can do it like here lending for instance to primary liquidity providers or pushing the postage but potentially the reserve bank of China. Why I'm saying this for instance in Fitch this is a particular morning time but in Fitch this article in Fitch in which I said that when you know the Omshor Remimbi you know the Omshor Yuan when you know there was a lot of scarcity and they say in this case that you know the popular, the people bank of China central bank bought offshore Remimbi that is CNH. Is it the case, is it not the case is it the case on stream what I have it on stream operations on stream circumstances maybe they don't have it maybe these things that Ricardo say are in normal times but maybe in very significant times the central bank of China directly intervenes in this market or just the only through bills, through bills they can intervene in two ways you know you adjust these bills over time or maybe another question that I have to Ricardo you know for institutional details is whether they can call back existing bills and so draw down liquidity from the market ok and then there is also that they care about the US dollar and they intervene through the through the Omshor Hong Kong and Ricardo also tackled that in the last question and then here a question which is could it be that because the exports and the dollar is so important for the central bank of China in addition to intervening like here intervening in some stream circumstances whether you know the monetary policy also pays attention to because it pays attention to the Chinese GDP and to the effects and the you know Omshor Hong Kong could be the Omshor Yuan can be important they do it they also pay attention to the exchange rate between the two between the Omshor and the Omshor the last slide I think I am on time you know it's a paper that I wanted to read more it's 58 pages but you stay there and you want to read more I don't know whether you felt the same with Ricardo's presentation that you want to know more and so things that they don't have is like other related experiences for instance one experience that is completely different here there is no currency but in a sense the euro area dollar market is an example that you know for different regulations between the US and outside the US they created a different dollar market also related to taxes and many other things there has been many pay currencies in the past in which they have liberalized current account but not capital current account but not capital account like for instance euro before the 1990s nowadays in the euro area we have a stream version of pay currencies in which we are going euro there is no capital controls but whenever there were problems for instance in Cyprus there were capital restrictions capital controls in the crisis of Cyprus things to know more about the money markets is what are the close substitutes and before I was saying more the ripos but also the close substitutes in the sense of safe assets it doesn't need to be with short maturity which will be more efficient of money but with different maturity so it looks to me really that there are very very few substitutes and therefore it's much more difficult apart from the liquidity regulation it's much more difficult from the market to provide substitutes but now that there is London, Luxembourg and all these places I wonder whether those places are jumping in when there are scarcities of the offshore sorry you are I would say is that there are currency boards in which normally there was very strong currency like the dollar and a weak one like the Argentina peso and they were not maxed as success but the Chinese case is different and you know one of the few cases in which has been very successful is the Hong Kong doing the currency board and that is also the HKMA so is there a kind of fixed effect and not fixed effect economically fixed effect that whenever the HKMA is there they manage very well a peg either with the dollar for the Hong Kong dollar or with the onshore yuan and thanks a lot it has been a great pleasure and hopefully these comments are useful Thank you I'll give the floor to Ricardo for the action and then unfortunately we have to cut on the general question I'll ask you all to reach out to Ricardo in the coffee bag because otherwise we will not have time for the coffee bag five very short answers to Jose Luis our follow ups first of all I agree with 97% of what you said and so thank you very much for all the comments mostly because as you said we're kind of also been fascinated by this some of the points in your last bullet are papers that we're trying to write right now just other papers not in this paper and others are papers that we should be writing that I didn't think of and so those are the ones that I would do but five very short points the first one on the offshore I agree entirely I would love to write a paper they use the London Singapore Hong Kong a lot of the effort in this paper which we've been working on for more than a year we're just getting the data understanding how this works I mean like I said the social details is just part of China that they don't explain to you actually what they do and it takes a lot of work just to figure out exactly what they do and so I'm happy that you like section two I hope other people like it just explaining understanding what they do it did require though then and the reason why we were able to do it Salim and I are not particular China experts was because Hong Kong has an HKMA which is a phenomenal institution and a BIS office which is a phenomenal institution and so we could really learn a lot and get a lot of really high quality data we just need to put that effort for Singapore and London and others but that's just why we do so much of that number two the Fitch description that you said in some ways it fits essentially what I was telling earlier really when they said they were a little imprecise so they say like oh they bought CNH the PBC doesn't hold any CNH what they did was exactly let the bills expire when they said and you noted Jose Luis so little imprecisions they don't buy back the bills but because the bills come to you they have it rolled over so that every two weeks there's an auction for the three month or every week for the maturities they simply can just go and issue fewer or less so they never buy them back but again at a weekly frequency they can perfectly control it that way so that sentence it was imprecise written now that I understand this better that paragraph from Fitch but it fits exactly into what was explained earlier and that is what they do they absolutely intervene in that market and why they intervene in 2016 precisely to control the M and as they were using it as escape valve to the dollar so that we could spend 10 minutes just on that paragraph but basically you can map it into all of the things that I had said earlier just I hope scientific progress now we understand more precisely what all of those intervening kind of sentences meant third briefly repose absolutely I mean I think the U.N. has grown a lot it is becoming a normal currency in that sense but one of the issues that it has is that it is still bonds issued in Yuan in which you could repo are still scarce why because you have these short central bank bills and you do not have a big government China issuing C&H government bonds just per repo market such as the one in the previous paper and with that is the limitation now what has been going on including very interesting recent paper by Shrager, Majori and Clayton and others is exactly about in the last two years three years China is starting to grow that's very internationally ultimately C&H bonds de facto even if pegged in some ways and that is the next stage so in a sense the Chinese are on it meaning they are trying to precisely create that sense but as of now it is a less liquid let's say RRE I think you put less alternatives than you would have for the dollar mostly because you are missing the repo and the bonds I will defend myself on external validity because we just saw an amazingly good paper that was very about what happens in Europe it was about internal validity and nobody played about external validity then China is a big economy it's just under your air but I guess you got away because we are in Europe which is fine we are at the ECB fourth and very clearly HKMA fix effect absolutely again what I use a lot remember that bell shaped is the fact that HKMA is an amazing job helping control this exchange rate turns out HKMA is an amazing institution because they have been pegging the HKMA dollar to the US dollar and they do an amazing job at it and here they are managing another peg of C&H to C&H and again they do an amazing job so it is absolutely an institutional fix effect since we are an institution want to copy we should spend more time learning what the HKMA and how good of a job they are and then finally I will just finish with the Euro dollar market and so that I will say Jose Luis that we are totally on board we have had an idea before you did three months ago which is we want to write a paper on the Euro dollar market because once you understand what is going on here what strikes you is there is a literature on the Euro dollar market in the 1970s and how it emerged it is different but shares many similarities and that is what we are working on right now not for this paper but because it is interesting enough even including institutions that is going to take a whole new paper but you have guessed exactly what is taking most of my time these days thanks a lot thanks a lot to all the participants Davide, Stefan, Jose Luis good luck with the relocation and Ricardo so let's have Stakely again at the coffee bag but let's congratulate