IMES DISCUSSION PAPER SERIES

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1 IMS ISSSION A SIS oiy Maur o Avia Forign urrny iuiiy Shorag unr Aggrga ik wih Mora Hazar Hirohi Fuiki iuion ar No INSTITT FO MONTAY AN ONOMI STIS BANK OF JAAN 2-- NIHONBASHI-HONGOKHO HO-K, TOKYO JAAN You an ownoa hi an ohr ar a h IMS W i: h:// o no rrin or rrou wihou rmiion.

2 NOT: IMS iuion ar Sri i irua in orr o imua iuion an ommn. Viw xr in iuion ar Sri ar ho of auhor an o no nariy rf ho of h Bank of Jaan or h Iniu for Monary an onomi Sui.

3 IMS iuion ar Sri Marh 200 oiy Maur o Avia Forign urrny iuiiy Shorag unr Aggrga ik wih Mora Hazar Hirohi Fuiki* Ara uring h rn goa finania rii, om nra ank inrou wo innovaiv ro-orr oraion o a wih h rom of forign urrny iuiiy horag: omi iuiiy oraion uing ro-orr oara an oraion for uying forign urrny a on aning wa in among nra ank. W how horiay ha nra ank imrov h ffiiny of uiirium unr forign urrny iuiiy horag y ho wo innovaiv morary oiy maur. Kywor: Saning wa in; Oraion uying S oar fun oui h S; ro-orr oara arrangmn J aifiaion: 58, F3, F33 *Aoia iror-gnra an Snior onomi, Monary Affair armn, Bank of Jaan -mai: Th auhor wou iay ik o hank Jam MAnrw for hi uggion o inorora h orronn nra anking mo ino my arir work. Th auhor wou ik o hank Anoin Marin an aff of h Bank of Jaan for hir ufu ommn. A rmaining rror ar my own. Thi ar wa rar in ar whi h auhor wa affiia wih h Iniu for Monary an onomi Sui a h Bank of Jaan. Viw xr in hi ar ar ho of h auhor an o no nariy rf h offiia viw of h Bank of Jaan.

4 . Inrouion In hi ar, w how ha nra ank imrov h ffiiny of uiirium unr iuiiy horag in forign urrny mark hrough wo morary oiy maur: ihr omi iuiiy oraion uing ro-orr oara or oraion for uying forign urrny a on aning wa in among nra ank. W how hi imrovmn in a wo-ounry xnion of haman an Marin 2007 mo. Th moivaion hin our fou on h wo morary oiy maur i h rn nra ank innovaiv ro-orr oraion o a wih h rom of forign urrny iuiiy horag. Bfor iuing h ai of h mo, u rify xain why h wo morary oiy maur wr inrou. Sin h announmn of BN aria on Augu 9, 2007 o un wihrawa from hr fun ha ha inv in h S urim mark, nra ank hav ao wo kin of ro-orr oraion o o wih h goa finania rii. Fir, nra ank hav win h rang of oara o mainain onro of mony mark uring h urrn rii. Th inu h aan of high-uaiy marka oara nomina in forign urrni or h in forign oaion. 2 For xam, on May 22, 2009, h Bank of Jaan BOJ i o a on iu y h govrnmn of h ni Sa, h ni Kingom, Grmany an Fran a igi oara. W fou on h S oar fun-uying oraion onu y vra nra ank aoia wih h S Fra rv rm auion faiiy. W o no iu many ohr imoran iu for nra ank, uh a h ro of monary oiy or nr of a ror oiy, highigh in h rn rii. Frixa 2009 rovi a urvy of h rn iraur. Of 2009 fou on h nr of a ror ro of nra ank in a goa onomy. 2 Th origina ia hin h ro-orr u of h oara wa a hif owar ra-im gro mn of nra ank aymn ym, whih ruir arg ovrraf faiii an hu oara. Th uroan nra Bank, a noa xam of a ro-orr nra ank, miiga orrowr mimah wn h oaion of i oara hoing an i iuiiy n hrough a orronn nra anking mo BM wihin h uro ara. Th S Fra rv a vra forign govrnmn on a oara.

5 Son, rgaring h uy of forign urrny, h S Fra rv, h uroan nra Bank B an h Swi Naiona Bank SNB aih wa in ha na B an SNB o rovi oar fun o hir ounrari in mr Th aion of B an SNB wr aoia wih h Fra rv aihmn of h rm auion faiiy TAF, whih n oar oain hrough wa in arrang wih h S Fra rv. 4 Afr h faiur of hman Brohr in Smr 2008, h aning wa in wih h S Fra rv xan o h Bank of ngan BO an h BOJ. uring hi rio, iuiiy in h S oar mony mark oui h S uiky vaora au of h un inra in h onrn ovr ounrary rik. IBO OIS ra inra uaniay Figur, an h finania rain wr ranmi o h FX wa mark, a hown y h unuua inra in h ra of h FX-wa-imi oar ra an IBO 3-monh aa in Figur 2. nr uh a iuaion, BO, B, SNB an BOJ ommn h oraion uying S oar fun a fix ra wihin hir aroria oara in Oor A Figur 3 how, h amoun of ouaning oraion uying S oar fun inra hary hrough h n of Thank o h uania roviion of oar in h mark oui h S, ighn in mony mark an FX wa mark a in 2009, a hown in Figur an Figur 2. Fa wih h imrovmn in h finania mark, h ra ai o h oraion uying S oar fun ro aov h mark ra, an h amoun of ouaning oraion uying S oar fun in hrough h fir haf of 2009 a Figur 3 3 Gorg, Knny an Miu 200 rovi an xn ovrviw of h vouion of riroa urrny arrangmn or oar wa faiii ha h Fra rv aih wih forign nra ank from 2007 o garing miria ui on h ffivn of h TAF o ru h rain in h hor-rm oar mark,, for xam, MAnrw a. 2008, Tayor an Wiiam 2009, an Wu Thy rah iffrn onuion ning on h onomri inifiaion aumion. 5 Baa an akr 2009 u aa of forign xhang wa air wn h S oar, uro, Swi fran, an Briih oun from Augu 9, 2007 o January 30, 2009 an fin ha h oraion uying S oar 2

6 how. On January 27, 200, h Fra On Mark ommi announ ha h morary iuiiy wa arrangmn wn h Fra rv an ohr nra ank wou xir on Fruary. BO, BOJ, B, an SNB announ h n of hir S oar-fun uying oraion h foowing ay. Givn ho vomn, w how how h wo morary oiy maur, h aning wa in wih h forign nra ank o uy forign urrny in h omi mark, an h aan of ro-orr oara arrangmn, h avia h iuiiy horag in h forign urrni an imrov h ffiiny of h uiirium in a wo-ounry vrion mo of haman an Marin 2007, whih xn Frman 999. Frman 999 xamin h imiaion of aggrga fau rik for h gnra uiirium wfar ff of on mark oraion an ioun winow. Hi mo how ha on mark oraion no ony ru h rik o whih h urhar of h i xo, u ao ra aggrga rik mor roay an ffiiny if a agn ar rik avr, vn if h nra ank inur o ra o fau. haman an Marin 2007 xn Frman mo y inrouing mora hazar. Sifiay, hy oin ou ha rior inniv o monior hir oan wou ru if h rior knw ha h nra ank, whih anno monior h uaiy of oan, wou aor o unr a mark-inniiv oiy, a oiy whry a nra ank urha h oan a a rannoun uniform ioun ra, whih Frman 999 rommn. haman an Marin 2007 how ha a mark-niiv oiy, a oiy whr a nra ank ranomy hoo a rri numr of rior o om for nra ank fun, ur h horoming of h mark-inniiv oiy. By rriing h numr of agn, h nra ank imi h mora hazar rom au h rior know ha h rior fun h iminih h viaion of h forign xhang wa mark from h ovr inr ary oniion afr h faiur of hman Brohr. 3

7 ar mor iky o a fun from ohr rior who an hk h uaiy of oan. By ing h rior om for nra ank fun, h nra ank xoi mark informaion o infr h a of h onomy au rior i u h ri a whih hy orrow uni h x vau of h oan i ua o h x vau of h oara. W xn h mo of haman an Marin 2007 y aing h foowing fiv a: om rior wan o onum goo rou y forign or, 2 h rior n forign urrny o urha forign or goo au forign or ony a forign urrny, 3 o oain forign urrny, h rior fir g on-han nomina in forign urrny in xhang for hir own urrny-nomina oan in an aiv offhor inrnaiona mark hrafr w a ha offhor mark h urooar mark, niay a mark for oara wa, 4 h rior oain forign urrny y rning h on-han o h iur of h in h forign ri mark or y on mark urha y h forign nra ank, an 5 h rior urha forign or goo uing forign urrny i.. hy unrak ro-orr aiviy. Th xnion aow u o xamin wo iu. Fir, w xamin h ff of omi on mark oraion, whih inu ning o forignr again omi oara. Th oima oiy in norma im i h mark-niiv oiy ha haman an Marin 2007 roo. Howvr, in our a, h mark-niiv oiy in on ounry ha oiiv iovr ff o rik avr rior in h ohr ounry y miigaing h rik of iuiiy horag an fau. Son, w xamin h ff of wo morary oiy maur: aning wa in wih h forign nra ank o uy forign urrny in h omi mark, an h aan of ro-orr oara arrangmn. onir a un inra in h rion of ounrary rik in h urooar mark, whih a o a huown of a ranaion, a w xrin in h urooar mark in ary Oor Our mo 4

8 how nra ank in wo onomi hou ak ounrary rik in h oara wa mark in on of h wo morary oiy maur o imrov h ffiiny of mark uiirium. Sifiay, h nra ank hou u h mark-inniiv oiy o uiu h ranaion in h urooar mark whn h rior ar ruan o rana in hi mark. Th mark-inniiv oiy ou ihr ning forign urrny o omi agn again omi oara or ning omi urrny o forign agn again forign oara. Th nra ank hou umn hir mark-inniiv oiy in h urooar mark y hir mark-niiv oiy in hir omi ri mark. Whn h rior rum ranaion in h urooar mark, h nra ank an xi from h mark-inniiv oiy in h urooar mark auomaiay. Th auomai xi om oi au unr h mark-inniiv oiy, h nra ank hir ioun ra ighy ow h ioun ra ha wou rvai unr no monioring ffor y h rior. Th ioun ra ar inxniv for h rior in a iuaion in whih a un inra in h rion of ounrary rik in h urooar mark a o a huown of a ranaion, u xniv for h rior unr norma mark oniion. Th wo morary oiy maur imrov h wfar of oh onomi in a iuaion in whih a un inra in h rion of ounrary rik in h urooar mark a o a huown of a ranaion, an hu h wo morary oiy maur ar inniv omai o oh nra ank. Th wo morary oiy maur, howvr, anno ahiv h am v of ffiiny a ahiv y h forign urrny mark ranaion unr norma oniion au nra ank anno u mark-niiv oiy. 5

9 To h of our knowg, w ar h fir o how how h wo morary oiy maur h avia iuiiy ri in h forign urrni in a horia mo a on Frman 999 an haman an Marin Th r of h ar i organiz a foow. Sion 2 xain h nvironmn an raing arn. Sion 3 anayz uiirium wih iuiiy onrain. Sion 4 onir h ro of h mark-niiv oiy an mark-inniiv oiy o miiga h iuiiy onrain in norma mark oniion. Sion 5 onir h ro of h aning wa in wih h forign nra ank o uy forign urrny in h omi mark whn h urooar mark i hu own. Sion 6 ui h ff of ro-orr oara arrangmn whn h urooar mark i hu own. Sion 7 iu raia iu ra o h wo morary oiy maur, an Sion 8 onu. 2. nvironmn an raing arn 2. Th nvironmn Thi ion xain our mo, whih xn haman an Marin 2007 o a wo-ounry mo. Thr ar wo y of agn, a rior an or, in h omi ounry hrafr Jaan an h forign ounry hrafr S. In oh ounri, rior an or ar ar an iv in ma viag. Thir ouaion ar normaiz o on, an hir ifim i ivi ino wo rio. Jaan an S rior an or ar now wih nonora goo ifi o hir viag in hir fir rio of if, in h 6 Thr ar many ohr way o anayz h ff of iuiiy ri on onumion in a muiounry mo. For xam, aigioni, Friozzi an ornzoni 2009 u a muirgion vrion of h mo of iamon an yvig 983 an how ha finania ingraion ru aggrga unrainy an inra wfar, u inu ank o ru hir iuiiy hoing, an ha hi inra h vriy of xrm vn. garing h ro-orr u of oara in aymn ym, Manning an Wiion 2006 xamin h xn o whih h iuiiy rik ariing from uh a mimah may miiga y aowing ro-orr u of oara in a wo-ounry, wo-ank mo in whih rik-nura ank minimiz x o wih r o hir oara hoi in ah ounry. 6

10 amoun of y, x,y, an X rivy. owra r rrn Jaan varia an ura r rrn S varia. Th un of rav an raing arn of or an rior in ah ounry uring hir ifim ar ummariz in Figur 4 an Figur 5, an w wi xain hm in urn ow. 2.2 Tri y Jaan or an rior Jaan or onum hir own nowmn an Jaan rior goo in h fir rio. A h ginning of h rio, Jaan young or rav o h Jaan rior viag wih whih hy ar air, whr hy may onum rior viag goo in xhang for h IO o ay in yn in h on rio a h Jaan mark, whr a IO nomina in yn ar rai. Thy rurn o hir viag of origin ar in h rio. A h ginning of h on rio, wih roaiiy θ, fau our. Sifiay, or o no rav o h Jaan mark, u ar o Jaan or viag whr hy ar fr o onum, an ony or rav o h Jaan mark o ay hir o h rior, whr i h monioring ffor xr y h Jaan rior, whih wi xain in h nx aragrah. Th fau hok i innny an uay iriu ovr im an i raizaion i no known in avan. i h am for a or a ong a rior hoo h am monioring ffor v. Wih roaiiy θ, a or rav o h Jaan mark o ay hir o rior. Th funion v θ v v how h x uiiy of Jaan or, whr, an how h onumion of or an rior viag goo whn young, an of or viag goo whn o. Th urri an on h hoi varia no h iniviua y. Th funion v an v ar oninuou an 7

11 oninuouy iffrnia riy inraing onav funion. v an v hav infini margina uiii whn hir argumn ar zro. Jaan rior onum uni of hir own nowmn whn young, an whn o, onum ihr uni of Jaan or goo wih roaiiy τ or uni of S or goo wih roaiiy τ. Th uiiy of Jaan rior i u τ u τ u, whr h uri on h uiiy funion no h y of goo onum. Th oninuou an oninuouy iffrnia uiiy funion u an u ar riy inraing an onav in ah argumn. Jaan rior inv ffor in monioring h oan hy xn o h or. ffor inary ra h roaiiy of fau, an hu i h fau roaiiy hy fa if hy inv. A rior an vrify h monioring ffor of h ohr rior, u nra ank anno. Jaan rior g iuiiy from hir ffor of monioring ϕ, whr ϕ i an inraing onav funion an ϕ 0 0. Jaan rior know h y of goo o onum whn o a h ginning of hir on im rio. τ rior rav o h Jaan mark. τ rior fir m wih T o S rior, who rav for hir arriva o h urooar mark wi xain in h nx aragrah, in h urooar mark, xhang h IO hy hav, an hn rav o h S mark. Th S rior rav from h urooar mark o h Jaan mark hoing Jaan IO. Arriva a h Jaan mark ak a in wo ag. In h fir ag, τ o Jaan rior an T o S rior, an o Jaan or arriv, whr 0 an. A h n of h fir ag, α τ o Jaan rior an AT o S rior av for hir fina inaion, whi h r rmain uni h n of 8

12 h on ag. In h on ag, h rmaining o or arriv if a fau hok our, an o or arriv ohrwi. Th rmaining rior know whhr a fau our or no a hi im. A rior fa h am roaiiy of aving h Jaan mark ary α for Jaan rior an A for S rior, an a or fa h am roaiiy of arriving ary, a or no a a. ah arn hi/hr arriva or arur im a oon a h/h urn o. Afr h vii o h Jaan mark, τ Jaan rior, T S rior an o or who hav no gon o h Jaan mark an hu fau ranomy ar o a Jaan or ian. Thy arriv a h or ian afr h ri ma y h rior ar om. 2.3 Tri y S or an rior S or onum hir own nowmn an S rior goo in h fir rio. A h ginning of h rio, S young or rav o h rior viag wih whih hy ar air, whr hy may onum rior viag goo in xhang for h IO o ay in oar h on rio a h S mark, whr a IO nomina in oar ar rai. Thy rurn o hir or viag ar in h rio. Wih roaiiy Θ, or o no rav o h S mark, u ar o S or viag whr hy ar fr o onum. i h monioring ffor xr y h S rior, whih wi xain in ai in h nx aragrah. Wih roaiiy Θ, a or rav o h S mark. Th fau hok i innny an uay iriu ovr im an i raizaion i no 9

13 known in avan. Th funion V Θ V how h x uiiy of S or. 7 V S rior onum uni of hir own nowmn whn young an ihr uni of S or goo wih roaiiy T or uni of Jaan or goo whn o wih roaiiy T. Th uiiy of S rior i T T. 8 S rior inv ffor in monioring h oan hy xn o h or. ffor inary ra h roaiiy of fau, an hu i h fau roaiiy hy fa if hy inv. A rior an vrify h ffor of monioring, u nra ank anno. S rior g iuiiy from hir monioring ffor Φ, whr Φ i an inraing onav funion an 0 0 Φ. S rior know h y of goo o onum whn o a h ginning of hir on im rio. T rior rav o h S mark. T rior fir m wih τ o Jaan rior in h urooar mark, xhang h IO hy hav, an hn rav o h Jaan mark. Afr h vii o h S mark, T o S rior, aong wih τ o Jaan rior an fau o S or ranomy S or ian. Arriva a h S mark ak a in wo ag. In h fir ag, T o S rior, τ o Jaan rior an Λ o S or arriv, whr 0 Λ an Λ. A h n of h fir ag, ατ o Jaan rior an A T o S rior av for hir fina inaion, whi h r rmain uni h n of h on 7, an rrn hir onumion of or an rior viag goo whn young an of or viag goo whn o. Th funion V an V ar oninuou an oninuouy iffrnia riy inraing onav. V an V hav infini margina uiii whn hir argumn ar zro. 8 Th oninuou an oninuouy iffrnia uiiy funion an ar riy inraing an onav in ah argumn. 0

14 ag. In h on ag, h rmaining Λ o or arriv if a fau hok our, an Λ o or arriv ohrwi. Th rmaining rior know whhr a fau our or no a hi im. A rior fa h am roaiiy of aving ary in h S mark α for Jaan rior an A for S rior, an a or fa h am roaiiy of arriving ary, a or no a a. ah arn hi/hr arriva or arur im a oon a h/h urn o. 2.4 Traing arn Thr xi nra ank in h Jaan mark an S mark ha iu urrny wih iniia ok of m yn an M oar o ah iniia o rior, who ma i on an who iv ony in h fir rio. A agn an iu unfaifia IO ha inify h iur. ga auhorii xi in h Jaan mark an S mark an nfor h agrmn wn h ari urrny in h viag. ga auhorii o no xi o nfor agrmn in h urooar mark an a h agn fina inaion. To onum whn o, rior mu ring omhing of vau o h or ian. urrny wi a y young or if i h hm o ay hir an hry o auir h goo hy ir. If i i a in uiirium, rior wi ruir ha rai wih urrny. Th young or wih o onum goo from rior viag u o no hav naiona urrny a han. Th young or offr rior a romi o ay a um of mony in h nx rio in h omi mark. Bau of h xn of ga auhoriy, w aum ha or an ony romi o ay in naiona urrny. Th young or wi

15 auir hi mony y ing om of hi/hr nowmn o an o rior who ring omi urrny o h viag ar in h rio. Givn hi un of ra, h o rior who wan o onum forign goo in h on rio n forign urrny. To oain forign urrny, h o rior mu xhang hir naiona IO for forign IO in h urooar mark. Whi h xhang of IO in hi mo i for h ak of onumion y h o rior in forign onomi, h xhang ou inrr a forign urrny funing in h offhor mony mark y muinaiona ank. Mony i nia o mak fina aymn o rir, an wihou raymn in h naiona urrny, rior wi no a. ar ar a h naiona mark u no away iaray. Bau h arriva ra of h o or i owr han h arur ra of o rior, h ary-aring o rior hir y-unrm o h a-aring o rior. Th amoun of rm in hi on-han mark i imi y h urrny ha h ary-arriving o or ring o h mark, an hu h on-han may ra a a ioun vau. In ummary, rior n o hink aou igh raing arn, ning on whhr hy onum forign goo or no, whhr hy ar h mark ary or a, an whhr fau our or no. or n o onir wo raing arn, ning on whhr fau our. No ha whhr a or arriv in h mark ary or a whn o o no aff hi/hr onumion. Ony whhr h/h fau or no aff hi/hr aiiona onumion whn o. Th roaiiy of fau of or in Jaan an S i innn, an w hav four a: a 00, wih roaiiy θ Θ of no fau in oh onomi; a 0, wih roaiiy θ Θ ha ony Jaan or fau; a 0, wih roaiiy θθ ha ony S or fau; a, wih roaiiy θθ ha oh Jaan an S or fau. Tho vn ar inifi ony afr h arriva 2

16 of a or in ah mark. Th iuaion of fau in on onomy wi known o h ohr onomy immiay. Whn w n o iinguih h v of hoi varia in h four a, w wi u h xrion x00, x0, x0, x o rrn h vau of varia x in a 00, 0, 0, an. 3. uiirium Thi ion fir xamin h oimizaion rom y or an rior an hn mov on o rn h mark uiirium oniion an finay fin a ymmri aiz-far uiirium wih iuiiy onrain. 3. Th Jaan or rom h yn ri of Jaan or goo in Jaan or viag a im. Bau ony or goo ar o in xhang for mony in h urrn rio, h yn ri of Jaan or goo i a maur of h ri v. m h auiiion of yn from o rior in xhang for or goo, π h ri of rior ian goo a of a romi o ay on yn on h Jaan mark a, an h nomina vau a of h Jaan or inn. Th Jaan or fa h foowing ug onrain: x m, m h, 2 h π, 3 m No ha uaion hrough 3 ak ino aoun h fa ha a yn wi auir y h young or in a 00, 0, 0 an an hu hi/hr onumion 3

17 iion a im o no n on h a of fau Howvr, hi/hr onumion a im ak a ony whn fau our in Jaan a 0, an a an n in uaion 4. Inring ho onrain ino h uiiy funion, h Jaan or maximiz: 5 y h hoi of m. Th ruing fir-orr oniion wi : whr rim inia fir rivaiv. m m m v mπ v x θ - - Θ v θ - Θ v, 0 v ' v ' v ' v ' π θ - Θ θ Θ 0 0, Th S or rom Th S or rom i a mirror imag of h Jaan or rom. h oar ri of S or goo in h S or viag a im. M h auiiion of oar from o rior in xhang for or goo, Π h ri in rior ian goo a of a romi o ay on oar in h S mark a, an H h nomina vau a of h S or inn. Th S or fa h foowing ug onrain: X M, 7 M H, 8 H Π, 9 M Inring h onrain ino h uiiy funion, h S or maximiz: 4

18 V M Π V M X M M θ Θ V θθ V, 0 y h hoi of M. Th ruing fir-orr oniion wi : V ' Π V' V ' V' θ Θ θθ Th Jaan rior rom h nomina vau of a rior oan o or a im. yn an yn h ar vau of nomina urha y Jaan an S a-aving rior a im. rrn h nomina ri a whih on yn of ha i xhang in h fir ag of vii in h Jaan mark a. If fau our, / i h roorion of h rmaining ha wi rai. Finay, h forign xhang ra of yn r oar ha rvai in h urooar mark. Simiary, h nomina vau of a rior oan o or a im. oar an oar h ar vau of nomina urha y S an Jaan a-aving rior a im. rrn h nomina ri a whih on oar of ha i xhang in h fir ag of vii in h S mark a. If fau our, Λ H/ Λ i h roorion of h rmaining ha wi rai. Tho noaion hou fin hr au om of h Jaan rior ariia in h S on-han mark. Jaan rior onum uni of hir own nowmn whn young. Whn o, hy onum ihr uni of Jaan or goo wih roaiiy τ or uni of S or goo wih roaiiy τ. Th ug onrain of a Jaan rior orn a whn young i: 5

19 y π. 3 ning on whhr h/h ar h mark ary or a, whhr h/h onum forign goo or no, an whhr h vn of fau our or no, a Jaan rior ha h foowing four ug onrain whn o. Fir, if h/h ar ary an onum Jaan goo wih roaiiy of α τ hn:, 00,0,0,. 4 Son, if h/h ar ary an onum S goo wih roaiiy of ατ hn: Λ Λ, 00,0,0,. 5 uaion 5 inorora h fa ha hy xhang hir yn-nomina oan ino oar-nomina oan a h ginning of im a h xhang ra. Thir, if h/h ar a an onum Jaan goo wih roaiiy of α τ hn, wihou fau an wih fau, rivy, w hav:, 00,0, if no fau in Jaan, 6, 0,, if fau our in Jaan. Finay, if h/h ar a an onum S goo wih roaiiy of ατ hn, wihou fau an wih fau, rivy, w hav: 7, 00,0, if no fau in h S, 8 Λ, 0,, Λ if fau our in h S. 9 6

20 7 ing h ug onrain a im an yi h foowing oimizaion rom for h young Jaan rior wih r o,, an a im : / ro ro / ro ro ro ro 0, 00,0 0, 00,0 00,0,0, 00,0,0,,,, u u u u u u y u Max ϕ τα α τ α τ α τ π Λ Λ Λ Λ. 20 Thrfor, h fir-orr oniion of hi rom for i: 0 ' ro ' ro / ' ro ' ro ' ro ' ro ' 0, 00,0 0, 00,0 00,0,0, 00,0,0, Λ Λ Λ Λ Λ Λ u u u u u u y u τα α τ α τ α τ π π. 2 Th fir-orr oniion for i: ' ro ' ro 0 0, 00,0 u u. 22 Th fir-orr oniion for i:

21 8 ' ro ' ro 0 0, 00,0 u u Λ Λ Λ Λ. 23 Th fir-orr oniion for i: ro 0, u ϕ α τ Th S rior rom S rior onum uni of hir own nowmn whn young. Whn o, hy onum ihr uni of S or goo wih roaiiy T or uni of Jaan or goo wih roaiiy T. Th ug onrain of a S rior orn a whn young i: Y Π. 25 ning on whhr h/h ar h mark ary or a, whhr h/h onum forign goo or no, an whhr fau our or no, a S rior ha h foowing ug onrain whn o. Fir, if h/h ar ary an onum S goo wih roaiiy of A T hn: 00,0,0,, Λ Λ. 26 Son, if h/h ar ary an onum Jaan goo wih roaiiy of AT hn: 00,0,0,,. 27 Thir, if h/h ar a an onum S goo wih roaiiy of A T hn, wihou fau an wih fau, rivy, w hav:

22 9 00,0,, if no fau our in h S, 28 0,, Λ Λ, if fau our in h S. 29 Finay, if h/h ar a an onum Jaan goo wih roaiiy of AT hn, wihou fau an wih fau rivy, w hav: 00,0,, if no fau our in Jaan, 30 0,,, if fau our in Jaan. 3 ing h ug onrain a im an yi h foowing oimizaion rom for h young S rior wih r o,, an a im : ro ro ro ro ro ro 0, 00,0 0, 00,0 00,0,0, 00,0,0,,,, TA A T A T A T Y Max Φ Λ Λ Λ Λ Π. 32 Thrfor, h fir-orr oniion for i:

23 20 0 ' ro ' ro ' ro ' ro ' ro ' ro ' 0, 00,0 0, 00,0 00,0,0, 00,0,0, Λ Λ Λ Λ Λ Λ Π Π TA A T A T A T Y. 33 Th fir-orr oniion for i: ' ro ' ro 0 0, 00,0 Λ Λ Λ Λ. 34 Th fir-orr oniion for i: ' ro ' ro 0 0, 00,0. 35 Th fir-orr oniion for i: ro 0, A T Φ Λ Λ Λ Mark aring oniion Th oniion for h aring of h mark of goo nomina in yn an oar in or viag ar:

24 m x, 37 M X. 38 No ha young or a im ar no aff y whhr o or hav fau, whih imi h xin of an uiirium in whih a or man for ra aan o no n on h raizaion of h fau hok. Morovr, h am numr of nomina yn an oar arriv in ah viag ihr rough y o rior or o or whhr or no a fau ha ourr. Hn, uaion 37 an 38 imy ha h ri v ar h am whhr a fau hok ha ourr or no. Th aring of h mark for oan in yn an oar ruir: h, 39 H. 40 Th uaion rmin h ri v an, h rio goo ri of aya in rio, π an Π. In h urooar mark, T S rior an τ Jaan rior xhang hir oan. W aum ha h xhang wi our on a ro raa ai, au rior uy hir oan inaiay. Th nomina xhang ra wi rmin o ua h nomina vau of h ranaion: τ T. 4 r aia hoing of forign oan in omi urrny om T τ oar for Jaan rior an τ T yn for S rior. uaion 42 ow how ha in h Jaan ra mark for oan, h um of h urha y h α τ Jaan a-aving rior,, an AT S a-aving 2

25 rior,, mu ua h unrm, whih i h um of h roorion of own y h α τ Jaan ary-aving rior, α τ, an h roorion of own y h AT S ary-aving rior, AT τ T Aτ : α α τ A τ τ AT. 42 Th ohr onrain in h Jaan ra mark for oan i ha h amoun of yn avaia o rurha h, an, i imi y h amoun of yn ivr y h ary-arriving or, a foow:. 43 In h S ra mark for oan, h um of h urha y h S A T a-aving rior,, an ατ Jaan a-aving rior,, mu ua h unrm, whih i h um of h roorion Λ of own y h A T S ary-aving rior, Λ A T, an h roorion Λ of own y h ατ Jaan ary-aving rior, Λ ατ T / τ Λ α T, a hown in uaion 44 ow: A T T ατ. 44 A T α Λ Th ohr onrain in h S ra mark for oan i ha h amoun of oar avaia o rurha h, an, i imi y h amoun of oar ivr y h ary-arriving or, Λ a foow: Λ

26 3.6 Symmri aiz-far uiirium wih iuiiy onrain onir a ymmri aiz-far uiirium whr oh Jaan an S iuiiy onrain uaion 43 an 45 ar ining an a h am y of Jaan an S rior hoo h am aion, an nra ank o no inrvn in h mark. No ha uaion 37 an 38 imy ha h ri v ar h am whhr or no a fau hok ha ourr. Taking h rori ino oniraion,,, /π, /, h h/, m m/, mπ m/π m /, /, / an for Jaan, an,, /Π, /, H H/, M M/, MΠ N /, /, / an for h S. For h ak of xring h ioun ra h nomina ri a whih on oar of ha i xhang in h fir ag of vii on h omi mark a in h man hu of rior, w wi u h noaion,,, an. ing h noaion an uiirium oniion in h oan an mony mark, uaion 2 an 39, an h m, w an imify h fir-orr oniion for Jaan agn a foow. In ariuar, uaion 6, 2, 22, 23, an 24 wou imifi a foow: u' y τ α u ' τ α u τ α τα Θ u v ' v '{ Λ Λ} { ' x θ v Λ Λ} ' 0 { θ u ' θu ' / } ' Θu ', / Λ θ u ' θu ', 48 23

27 24 ' ' 0 u u Λ Λ Θ Θ, 49 ' u ϕ θ α τ. 50 uaion 42, h uiirium oniion of h Jaan ra mark for oan, om: A AT τ τ α τ α. 5 Th iuiiy onrain in h Jaan ra mark for oan om:. 52 Nx, w an imify h fir-orr oniion for S agn a foow. In ariuar, uaion 2, 33, 34, 35, an 36 afr uing h uiirium oniion in h oan an mony mark, uaion 8 an 40, an H M, om: 0 ' ' ' Θ V X V V, 53 Λ Θ Θ Λ Λ Λ Λ TA A T A T A T Y S S S S S } '{ } '{ ' ' } { } '{ } { } '{ ' θ θ, 54 ' ' 0 S S S S Λ Λ Θ Θ, 55 ' } '{ 0 S S S S θ θ, 56 ' S S S S A T Φ Λ Λ Λ Θ. 57

28 uaion 44, h uiirium oniion of h S ra mark for oan om: S A T T S ατ A T α Λ. 58 uaion 45, h iuiiy onrain in h S ra mark for oan om: Λ S. 59 Finay, h uiirium oniion in h urooar mark, uaion 4, om: T τ. W oain h uiirium in h foowing way. Fir, y inring h f-han i of uaion 60 ino uaion 47, 49, 54, an 56, w an imina h rm of ra, /. Thn w u 4 uaion, i.. 46 hrough 59, o ov for 4 unknown,,,,,,,,,,,,, an. Son, uing uiirium oniion in h 60 mony mark m m / m / an M M / M /, w ov for an givn m, M, m, an M. Finay, uing uaion 60,,, an, w oain. No ha omiion in h ra mark for oan imi hr oiiii:, >0 an >0 or > ; >0 an 0, or <, 0; an >0. Simiar oniion ay o h S ra mark for oan. Furhrmor, uaion 48, 49, 54, an 55 how ha h ioun ra hav ur oun givn h v of h ffor of monioring a foow: θu ' θ, u ' 00 θ{ u ' u ' 00} u Θ H Θu ' Λ Θ H ' 00 Θ{ u ' u ' 00} Λ, Θ H Θ ' Λ Θ H ' 00 Θ{ ' ' 00} Λ,

29 θ ' θ. ' 00 θ{ ' ' 00} 64 Th fir inuaii in h uaion om from h fa ha u ' > u ' 00 an ' > ' 00. Th uaii ho whn rior hav onan margina uiii from onumion, an h ri of rf ony h fau rik, givn h ffor of monioring oan. Our aumion i ha ining iuiiy onrain, an uaion 52 an 59, ru h ra of ioun ow h ur oun. For h ak of iuraion, o oain uiirium, onir a a whr h margina uiii of onumion from or goo ar onan. Thn, uaion 47, 50, 54 an 57 om: u' y τ θ u ' τ Θ u', 65 τ αθ u ' ϕ, ' Y T Θ ' T θ ', S T ΑΘ ' Φ. Λ uaion 65 an 67 inia ha rior ua h margina uiiy of onuming hir own nowmn goo wih h x uiiy of onuming omi or goo an forign or goo, aking ino aoun h roaiiy of a hok an or fau whn hy xri h monioring ffor an. uaion 66 an 68 ay ha rior iuiiy from h ffor of on mor uni of monioring ua h margina uiiy of onumion from hir origina oan an on-han oan whn h rior ar a, onum omi or goo, an fau our. uaion 48, 68 θ 56, 49 an 55 a o h ru ha an Θ. Λ 26

30 Thrfor, h or an rior 5 oniion 46, 48, 49, 5, 52, 53, 55, 56, 58, 59, 60, an 65 hrough 68, w hav 5 unknown,,,,,,,,,,,,,, an. 4. ff of on mark urha o avia omi iuiiy onrain 4. Th nhmark aoaion W onir h ff of on mark urha an nra ank ioun winow oiy foowing haman an Marin To vaua h ff of h oiy oion on rour aoaion, w n a nhmark rour aoaion in whih iuiiy onrain o no in. In uh a iuaion, Jaan rior an S rior ug onrain wou hang in wo way. Fir, if hr i no fau, a rior riv a rurn of 00% from hir oan. Son, if hr i fau, ary-avr riv a rurn of 00% from hir oan, an a-avr riv rurn ha ar aff y h fau hok from hir oan. For xam, if Jaan rior av a an onum Jaan goo, wihou fau, hn 6 om, 00, 0 au, 0. Wih fau, ary-arriving i ai in fu vau, an of h a-arriving, ony arriv, hn h f-han i of uaion 7 i { } { }. Morovr, no rior wi u h ra mark for oan in hi a, an hu 0. Th oniraion wi hang h Jaan uiirium oniion a foow: v ' v ' x θ v ' 0, 69 27

31 u' y { τ α τα Θ} u τ α τα Θu { τ α τ α θ } u ' { θu ' } ' ', 70 τ α θu ' ϕ. 7 Simiary, S or fir-orr oniion om: V ' V { T A TA θ } ' TA θ ' ' X Θ V T A Θ ' 0 ' Y { T A T A Θ}, ', T A Θ ' Φ. 74 Finay, h uiirium oniion in h urooar mark om: T. τ 75 Wih h vn uaion 69 hrough 75 w ov for vn unknown in h nhmark aoaion:,,,,, an. W vaua h ff of oii o h xn ha a ariuar oiy g an uiirium o o h aov nhmark vau:,,,,, an. W fir vrify ha h nhmark aoaion an h ymmri aiz-far uiirium fin in Sion 3.6 ahiv iffrn rour aoaion. Suo ha an, an hrfor ϕ ϕ Thn, h righ han i of uaion 50 an 7 mu ua, an hu o ar h righ han i of h uaion: u ' u ' { / } { }, whih ho ony if 0. Thi a o a onraiion au { / } > { θ / } a uaion 6 how an > 0. 28

32 4.2 Mark-niiv oiy an mark-inniiv oiy Frman 999 roo a oiy ha ahiv ua onumion for a-aving an ary-aving rior, an ua rik-haring for fau y a rior an or. Sifiay, h roo a ommimn y h nra ank o urha a of h a-arriving, α τ A τ, in a o onomy mo auming ha h fau i xognou an h v of ffor of monioring oan i away zro. Thi ommimn, y ing an ua zro, uaiz h onumion of h a-aving an ary-aving rior. Howvr, foowing haman an Marin 2007, w how ha h mark-inniiv oiy, whih h ioun ra for h mark on a Frman 999 ugg, o no ahiv h nhmark aoaion in our u for h foowing raon. Fir, oima oiy y a nra ank n a ommimn o urha h a-arriving a a ioun ra of if no fau hok our, an a ioun ra of θ an B Θ if a fau hok our, whr uri an B how h ioun Λ ra offr y h wo nra ank. Bau h nra ank ommi o h ioun ra, i anno h ri ning on whhr a fau hok our or no. If i hoo ioun ra of, an fau hok our, a rior ak for a nra ank oan an hn fau. If i hoo an B u a fau hok o no our, h nra ank o no rov h iuiiy onrain omy. Morovr, if a nra ank aow a rior o a fry h nra ank ning, rior hoo ihr no ffor or no orrowing from h nra ank. To hi oin, h vau of a ivrifi oan orfoio in a fau iuaion wih no ffor invov wi ua o no an 29

33 Λ Λ NO no. If <, a rior wih un rfr o i o h nra ank wihou making ffor. If no >, no rior wou ik o hir un o h nra ank, an h ioun winow oiy o no work. No ha Frman 999 ommimn ruir h nra ank o hoo h ra a whih a rior ar wiing o hir un, an h nra ank hoo a ioun ra of. If hr i a iuiiy hok, a rior wi ak for a nra ank oan an hn fau. Thi i au unr hi ommimn oiy, no <, an hu a rior xr no ffor, an h nhmark aoaion anno uor y h mark-inniiv oiy. To o wih h rom of mark-inniiv oiy, haman an Marin 2007 roo a mark-niiv oiy, whr a nra ank ranomy hoo a rri numr of rior o om for nra ank fun hrafr h rior ar known a ar. By rriing h numr of ar, h nra ank imi h mora hazar rom au h rior know ha hy ar mor iky o a fun from ohr rior who an hk h uaiy of oan y xamining h monioring ffor unrakn y h ohr rior. By ing h rior om for nra ank fun, h nra ank xoi mark informaion o infr h a of h onomy au rior i u h ri a whih hy orrow uni h x vau of h oan i ua o h x vau of h oara. haman an Marin 2007 how ha h mark-niiv oiy inu a rior o rovi h ffor v an, an ha h nhmark aoaion an uor if h roaiiy ha a rior i hon o a ar i vry ma. 9 Th inuiion i ha h nfi for rior of viaing from h ffor v an wou 30

34 ouwigh y h x o from h rior no ing hon o a ar an hy wou hn hav o hir oan o h ohr ar, who vrify h uoima v of ffor an hary ioun hir oan. Th x o from h viaion from h ffor v an ou high if h roaiiy ha a rior i hon o a ar i vry ma. 0 In our framwork, a ong a h nra ank ar wiing o ik u om o omi rior an om o forign rior who ar u o a hok an ariiaing in h omi ri mark o a ar, w an immn h mark-niiv oiy in ah ri mark. Th mark-niiv oiy, if ai in oh h S an Jaan, imrov h wfar of uiirium owar h nhmark aoaion hrough wo ff a haman an Marin 2007 ugg. Fir, h mark-niiv oiy, if ai in oh h S an Jaan, miiga h rik of iuiiy horag in omi ri mark an h rik of fau. Son, h mark-niiv oiy ha iovr ff o h forign rior. Th iovr ff om from h fa ha h rior onuming forign or goo nfi from h oraion of h forign nra ank. 4.3 Mark-niiv oiy in omi ri mark an mark-inniiv oiy in h urooar mark unr h finania rii onir a iuaion in whih a un inra in h rion of ounrary rik our, an h urooar mark hu own. Th nra ank anno hoo ar in h urooar mark. W aum ha h omi ri mark in h wo onomi 9 Kahn an or 2009 how ha rri a o h nra ank mn ym o-a iring inu h agn o monior h ohr agn. Th mark-niiv oiy hr i an xam ha iring imrov h ffiiny of nra ank iuiiy roviion. 0 haman, hiu an Moio 2008 rovi a horia mo in whih agn nognouy hoo h gr of iring. 3

35 funion normay. mmr ha haman an Marin 2007 onir a a of mark oa in whih hr ar no a-aving rior. In hir a, a nra ank an ror om of h mark ranaion y ing a ioun ra han h ra orroning o h no-monioring ffor v whn mark work, namy, no. In our mo, y imiar raoning, h nra ank an ay h mark-inniiv oiy o ror om of h ranaion in h urooar mark an ay h mark-niiv oiy o ranaion in h omi ri mark. W wi iu wo y of mark-inniiv oii in h foowing ion: ning forign urrny o omi agn again omi oara or ning omi urrny o forign agn again forign oara. 5. Saning wa in wih h forign nra ank o uy forign urrny in h omi mark Suo ha a hang in h rion of ounrary rik our, for xam, au of h un inra in h rion in h fau rik of forign rior a w hav n in Smr Oor 2008, an h urooar mark hu own. Thn, τ Jaan rior an T S rior anno xhang hir IO a h urooar mark, an hu anno onum forign goo. Th our of h urooar mark ary ru wfar in oh onomi. In uh a iuaion, nra ank an inrou aning wa in, an uy hir own urrni aroa again hir omi oara, o ria h ranaion in h urooar mark. Thy an ro uing h foowing, a ummariz in Figur 6 an Figur 7. Fir, τ Jaan o rior an T S o rior inify hir a hok, an hy go o h omi mark, rahr han h urooar mark. 32

36 Son, omi nra ank a a of h naiona IO in xhang for forign urrny, uing h forign urrny oain from h wa agrmn wih h ohr nra ank. Th xhang ra mu aify uaion 60. Howvr, h ioun ra for h aan of naiona IO mu a ioun ra ha orron o h mark-inniiv oiy; namy, a ioun ra ighy owr han no an NO Λ. Λ Thir, τ Jaan o rior an T S o rior vii h or ian, wihou ariiaing in h S mark an Jaan mark for oan. nra ank u h mark-niiv oiy in hir omi ri mark, in whih om of h omi rior work a ar for nra ank oan o nourag monioring. Finay, nra ank o y oaining omi urrny from o or. No ha, wihou fau, nra ank o argr amoun of urrny han hy n o h ohr nra ank hrough h wa agrmn a Figur 7 how. Wih fau, nra ank wou o mar amoun of urrny han hy n o h ohr nra ank hrough h wa agrmn. In hi way, h omi ri v wou aff y h nry of forign rior, an h hang in h ri v iriu h fau rik o a agn onuming omi goo. Nonh, h aning wa in an uy of omi urrni aroa y nra ank again hir omi oara rovi highr wfar han for h iuaion of huown of h urooar mark, whih a o no onumion of forign goo. Howvr, nra ank inrvnion anno ahiv h v of ffiiny ha h forign Anoin 2009,.4 iu h ff of nay ra o rn ank inniv o orrow oo many no inrnaiona rrv unr h ommoiy anar. In our mo, ioun ra ighy owr han NO an rn agn inniv o ra wih nra ank or ra wih ah ohr in h urooar mark. 33

37 urrny mark ranaion unr norma oniion ahiv au nra ank anno u h mark-niiv oiy in h urooar mark. 6. ro-orr oara arrangmn Thi ion onir how h aan of ro-orr oara arrangmn unr h our of h urooar mark imrov wfar. Thi aan an ro in h foowing way, a ummariz in Figur 8 an Figur 9. Fir, τ Jaan o rior an T S o rior inify hir a hok, oi hir IO in hir omi nra ank, an go o h forign mark. Son, forign nra ank xhang h o rior IO ino hir own urrny. Th oraion am oi y ro-orr oara arrangmn, uh a h orronn nra anking mo BM, ink wn urii mn ym an rmo a o a urii mn ym. nr h ro-orr oara arrangmn, ah nra ank rv a a uoian of inrnaiona oara, an rovi h ohr nra ank wih informaion on h ioun ra for h aan of naiona IO. Th ioun ra mu h on ha orron o h mark-inniiv oiy; namy, a ioun ra ighy owr han no an Λ Λ NO an an xhang ra ha aifi uaion 60. Thir, τ Jaan o rior an T S o rior vii h or ian, wihou ariiaing in h S mark for oan an Jaan mark for oan, rivy. nra ank u h mark-niiv oiy in hir omi ri mark, in whih om of h omi rior work a ar for nra ank oan o nourag monioring. Finay, nra ank o y oaining omi urrny from o omi or, on haf of h ohr nra ank. No ha wihou fau, nra ank o 34

38 argr amoun of urrny han hy n o h ohr nra ank hrough h wa agrmn. Wih fau, nra ank o mar amoun of urrny han hy n o h ohr nra ank hrough h wa agrmn. Th omi ri v wou aff y h nry of forign rior, an h hang in h ri v iriu h fau rik o a agn onuming omi goo. In hi way, h aan of ro-orr oara arrangmn rovi highr wfar han h iuaion in whih huown of h urooar mark a o no onumion of forign goo. Howvr, nra ank inrvnion anno ahiv h v of ffiiny ha h forign urrny mark ranaion unr norma oniion ahiv au nra ank anno u h mark-niiv oiy in h urooar mark. 7. iuion 7. oiy oorinaion Th wo morary oiy maur, h aning wa in wih h forign nra ank o uy forign urrny in h omi mark an h aan of ro-orr oara arrangmn, ar aro imroving for oh onomi, an hu oh nra ank ar wiing o oora. Th ru in Sion 5 an 6 how ha oiy oorinaion wn nra ank in h ara of mony mark oraion ou yi uania wfar gain in a finania rii. 2 Th ru onra hary wih h infunia ru of Of an ogoff 2002, aing ha h margina wfar gain in h oiy oorinaion of monary oii ar ma, an hu nra ank o no hav inniv o oora. 2 S Shirakawa 2009 on hi oin. 35

39 7.2 Ar h wfar gain from h wo morary oiy maur iffrn? A a omarion of Figur 7 an Figur 9 how, h wo morary oiy maur iffr ony on on oin: whhr nra ank wa omi urrni or oara in 2. For oh morary oiy maur, h uima rik of fau om from h omi or fau rik an h mora hazar of omi rior. Thrfor, in our framwork, a ong a h naur of h omi fau rik an mora hazar i w known, an h wo nra ank ar wiing o har hi informaion, h wo morary maur hav h am wfar-imroving ff. 7.3 nry ino an xi from h mark-inniiv oiy in rai o finania iniuion hav inniv no o ry on h mark-inniiv oiy a mark oniion imrov? To hink aou hi uion, uo ha h onfin of h ounrary i rviv, an oh h mark ranaion xain in Sion 5 an h nra ank maur xain in Sion 6 ar avaia. A w hav xain in Sion 4.2, h mark-inniiv oiy ha ria h ranaion in h urooar mark; namy, a ioun ra ighy owr han no an NO Λ, Λ wou no u if h mark ranaion rovr au i i har for rior o xhang hir oan iaray an oin h omi ri mark, han o g nra ank oan in forign urrny. Thrfor, h mark-inniiv oiy inu mark ariian o ra wih ah ohr in h urooar mark if hy hink h urooar mark ha rovr o funion normay. Whi in rai a nra ank may no ur whhr or no h aroria ioun ra rmain h am for an afr h finania rii, a ong a h origin of rii i in h un inra in h ounrary rik au of morary hang in h rion of rik y h mark ariian, our mo i onin wih h rai akn 36

40 y h non-s nra ank. Thy ra ai o h S oar fun-uy oraion aov h mark ra for h finania ri, an iourag h u of h oraion uying S oar fun a h iuaion wihin finania mark imrov. For xam, BOJ oraion uying S oar fun gan wih h mark-niiv oiy in Smr 2008, an hn mov on o h mark-inniiv oiy in Oor 2008, an ahiv an xi wihou rurning o mark-niiv oiy in Fruary rvaion Our ru ha oh h aning wa in wih h forign nra ank uying forign urrny in h omi mark an h aan of ro-orr oara arrangmn hav h am wfar-imroving ff uring h finania rii, n on vra aumion of h mo. Fir, aing high-uaiy marka oara nomina in forign urrni or h in forign oaion ha n a rmann maur in om nra ank. Th aan i moiva y an irrvri goa hif owar ra-im gro mn of nra ank aymn ym, whih ruir arg amoun of oara for inrnaionay aiv ank. In our mo, h aan of ro-orr oara arrangmn i a morary maur o ra h ranaion in h urooar mark uring h iuiiy 3 Th BOJ onu h foowing oraion uying S oar fun. Fir, on Smr 8, 2008, BOJ announ oraion uying S oar fun again oo igi oara wih oan ra rmin y mui-ra omiiv auion, whih ou inrr a a mark-niiv oiy. Th ra hou no fa ow h ra y h Fra rv Bank of Nw York a a rvaiing S Ovrnigh Inx Swa mark ra ha orron o h uraion of h oan. Son, a finania mark oniion worn, on Oor 4, 2008, h BOJ, inrou oraion uying S oar fun whry fun ar rovi a a fix ra for ah oraion for unimi amoun again oo oara a mark-inniiv oiy. Th BOJ oraion uying S oar fun ui a muh a 22,76 miion oar a of mr 3, 2008, a i ak. ar, a finania mark funioning imrov, h amoun of S oar ui ra ramaiay. In mr 2009, h amoun of S oar ouaning from h BOJ S oar fun-uying oraion f o 545 miion oar. Th a hu oraion y h BOJ on January 2, 200, rovi a i a 00 miion oar. Givn ho vomn, on January 28, 200, h BOJ announ ha i wou o oraion uying S oar fun again oo oara, au h wa in wr no ongr n givn h imrovmn in finania mark funioning. 37

41 horag whih ak h form of a huown of h oara wa mark. If h nra ank inrvnion ar rmann, h aionary uiirium an h orroning nra ank oii ou hang forvr. Son, vn rriing our anion o morary maur in h finania rii, wo maur ruir iffrn ranaion o in rai, an hr ar no raon o iv ha hy oxi. For xam, in h a of aan of ro-orr oara arrangmn, h ranaion o may inu h o of unraning forign ga ym among h onomi, o vaua h vau of oara. Thir, our mo aum ha h u of ro-orr oara ruir a nra ank ony hir knowg aou h aroria omi ioun ra for h mark inniiv oiy ha rf omi fau rik an h mora hazar y h omi rior, an uo ha nra ank ou aiy har h informaion rvan for h mark inniiv oiy wih ohr nra ank. In rai, h aan of ro-orr oara ruir rik managmn of forign on y a nra ank, an unraning h orr vau of oara or h ioun ra, an h uiirium nomina xhang ra on a ra-im ai ou iffiu for nra ank. Finay, our mo aum ymmri uy of forign urrny oan ma y h nra ank an ymmri aan of ro-orr oara y h nra ank. In rai, ony S oar an uro ar ui y forign nra ank. Som nra ank uniaray a oara nomina in forign urrny an iu in forign ounri, for xam, h S Fra rv. 8. onuion W how nra ank imrov h ffiiny of uiirium unr forign urrny iuiiy horag hrough wo morary oiy maur: ning forign urrny o 38

42 omi rior again omi oara or ning omi urrny o forign rior again forign oara, in a wo-ounry mo. onir a iuaion in whih h iuiiy horag ak h form of a huown of h oara wa mark, whih i h nia mark for oaining finania a nomina in forign urrny. Th nra ank in h wo onomi hou ak ounrary rik in h oara wa mark in on of h wo morary oiy maur. Tho morary oiy maur h nra ank in h wo onomi ria a ar of h funioning of h oara wa mark. Th wo morary oiy maur, umn y h nra ank mark-niiv oiy in hir omi ri mark, ary imrov h wfar of oh onomi an hu ar inniv omai o oh nra ank. Th wo morary oiy maur, howvr, anno ahiv h v of ffiiny ha h forign urrny mark ranaion unr norma oniion ahiv au nra ank anno u mark-niiv oiy. frn Anoin, Marin, oniing Bagho an h F on o Smr, Journa of Mony, ri an Banking 4 2 3, 2009, Baa, Naohiko an Frank akr, From Turmoi o rii: ioaion in h FX Swa Mark for an afr h Faiur of hman Brohr, Journa of Inrnaiona Mony an Finan 28, 2009, aigioni, Faio, Faio Friozzi an Guio ornzoni, Finania Ingraion an iuiiy ri, mimo, Novmr haman, Jam an Anoin Marin, iouning unr Aggrga ik wih Mora Hazar, Saff or No. 296, Fra rv Bank of Nw York, haman, Jam, Jonahan hiu an Migu Moio, A Mo of Tir Smn Nwork, Working ar , Bank of anaa,

43 iamon, ouga W. an hii H. yvig, Bank un, oi Inuran an iuiiy, Journa of oiia onomy, 9, 983, Frman, So, iouning unr Aggrga ik, Journa of Monary onomi 43, 999, Frixa, Xavir, Monary oiy in a Symi rii, mimo, Gorg, ina S., raig Knny an Jaon Miu, nra Bank oar Swa in an Ovra oar Funing o, Saff or no. 429, Fra rv Bank of Nw York, January 200. Kahn, M. har an Wiiam or, aymn Smn: Tiring in riva an ui Sym, Journa of Mony, ri an Banking, 4 5, 2009, Manning, J. Mark an Mahw Wiion, Moing h ro-borr of oara in aymn Sym, Bank of ngan, Working ar 286, MAnrw, Jam, Aani Sarkar an Zhnyu Wang, Th ff of h Trm Auion Faiiy on h Inr-Bank Offr a, Saff or no. 355, Fra Bank of Nw York, Juy Of, Mauri, nr of a or in a Goaiz Wor, Monary an onomi Sui, 27, Th Bank of Jaan, Iniu for Monary an onomi Sui, 2009, Of, Mauri an Knnh ogoff, Goa Imiaion of Sf-Orin Naiona Monary u, uarry Journa of onomi 7, 2002, Shirakawa, Maaaki, Inrnaiona oiy on o Finania ri, mark a h Symoium Sonor y h Fra rv Bank of Kana iy, Jakon Ho, Wyoming, Augu 22, Tayor, John B. an John. Wiiam, A Bak Swan in h Mony Mark, Amrian onomi Journa: Maroonomi,, 2009,

44 Wu, Tao, On h ffivn of h Fra rv Nw iuiiy Faiii, Working ar 0808, Fra rv Bank of aa, May,

45 Figur IBO OIS ra Sour: Th Bank of Jaan, Monhy or of n onomi an Finania vomn, January 200, har

46 Figur 2 FX-wa-imi oar ra IBO ra 3-monh aa Sour: Th Bank of Jaan, Monhy or of n onomi an Finania vomn, January 200, har

47 Figur 3 nra ank oar wa amoun ouaning y forign nra ank Sour: Gorg, Knny an Miu 200, har. 44

48 Figur 4 arn of rav whn young or viag Jaan or viag 4 4 Jaan mark rior viag 2 rior viag urooar mark rior viag 2 rior viag S mark or viag ni Sa or viag Young or go o rior viag. 2 Young or m young rior o oain goo in xhang for. 3 Young or go ak hi/hr viag. 4 Young or m o rior or fau o or o oain urrny in xhang for goo. No: Thik in how or, oi in how Jaan, an o in how S rin. 4 45

49 Figur 5 arn of rav whn o or viag Jaan or viag 5 Jaan mark 7, 9 6, 8 4 rior viag rior viag rior viag urooar mark rior viag 7, 9 4 or viag 6, 8 S mark 5 or viag ni Sa or viag τ an T of o rior inify hir a hok, go o h urooar mark. 2 Thy xhang hir omi IO for forign IO. 3 τ an T of o rior go o h forign or viag. 4 A ohr rior vii hir hom mark. 5 Wih roaiiy θ an Ξ, -ε an -Ε o or fau, go o young or viag. 6 Arriva ra of hon or in h hom mark i owr han h arur ra of rior -α-τ-ατ. 7 ar rai wih omi urrny, an ary aring o rior vii or viag. 8 - or --- or arriv a h hom mark, an a aring o rior inify if fau ourr. 9 ar rai wih omi urrny, an a aring o rior vii or viag. No: Thik in how or, oi in how Jaan, an o in how S rin. 46

50 Figur 6 arn of rav whn o wih forign urrny nomina fun-uying oraion or viag Jaan or viag 5 7, 9 rior viag urooar mark rior viag Jaan mark , 8 4 rior viag rior viag 2 4 or viag 7, 9 6, 8 S mark 5 or viag ni Sa or viag τ an T of o rior inify hir a hok, go o h omi mark. 2 omi nra ank xhang hir omi IO ino forign urrny. 3 τ an T of o rior go o h forign or viag. 4 A ohr rior vii hir hom mark. 5 Wih roaiiy θ an Ξ, -ε an -Ε o or fau, go o young or viag. 6 Arriva ra of hon or in h hom mark i owr han h arur ra of rior -α-τ-ατ. 7 ar rai wih omi urrny, an ary aring o rior vii or viag. 8 - or --- or arriv a h hom mark, an a aring o rior inify if fau ourr. 9 ar rai wih omi urrny, an a aring o rior vii or viag. No: Thik in how or, oi in how Jaan, an o in how S rin. 47

51 Figur 7 arn of mn wih forign urrny nomina fun-uying oraion τ an T of o rior inify hir a hok, go o h omi mark. 2 omi nra ank xhang hir omi IO ino forign urrny. nra ank wa hir omi urrni ino forign urrni. Jaan IO S $ S IO Jaan BOJ F S o rior o rior S $ Yn Yn 3 τ an T of o rior go o h forign or viag. Jaan S $ Yn S o rior o rior Jaan young or S young or 4 A ohr rior vii hir hom mark. 5 Wih roaiiy θ an Ξ, -ε an -Ε o or fau, go o young or viag. 6 Arriva ra of hon or in h hom mark i owr han h arur ra of rior -α-τ-ατ. 7 ar rai wih omi urrny, an ary aring o rior vii or viag. 8 - or --- or arriv a h hom mark, an a aring o rior inify if fau ourr. 9 ar rai wih omi urrny, an a aring o rior vii or viag. BOJ F JY Jaan IO S $ S IO Jaan young or S young or urrni wa in an 2 wi rurn o nra ank in 5 in h nx rio. 48

52 Figur 8 arn of rav whn o wih ro-orr oara arrangmn or viag Jaan or viag 7, 9 5 Jaan mark , 8 rior viag rior viag rior viag urooar mark rior viag 3 2 7, 9 6, 8 S mark 5 or viag ni Sa or viag 4 or viag τ an T of o rior inify hir a hok, go o h forign mark. 2 Forign nra ank xhang hir omi IO ino forign urrny. 3 τ an T of o rior go o h forign or viag. 4 A ohr rior vii hir hom mark. 5 Wih roaiiy θ an Ξ, -ε an -Ε o or fau, go o young or viag. 6 Arriva ra of hon or in h hom mark i owr han h arur ra of rior -α-τ-ατ. 7 ar rai wih omi urrny, an ary aring o rior vii or viag. 8 - or --- or arriv a h hom mark, an a aring o rior inify if fau ourr. 9 ar rai wih omi urrny, an a aring o rior vii or viag. No: Thik in how or, oi in how Jaan, an o in how S rin. 49

53 Figur 9 arn of mn wih ro-orr oara arrangmn τ an T of o rior inify hir a hok, go o h forign mark. 2 Forign nra ank xhang hir omi IO ino forign urrny. nra ank wa hir omi IO ino forign IO. Jaan S $ Yn S o rior o rior Jaan IO BOJ F S IO 3 τ an T of o rior go o h forign or viag. Jaan S $ Yn S o rior o rior Jaan young or S young or 4 A ohr rior vii hir hom mark. 5 Wih roaiiy θ an Ξ, -ε an -Ε o or fau, go o young or viag. 6 Arriva ra of hon or in h hom mark i owr han h arur ra of rior -α-τ-ατ. 7 ar rai wih omi urrny, an a aring o rior vii or viag. 8 - or --- or arriv a h hom mark, an a aring o rior inify if fau ourr. 9 ar rai wih omi urrny, an a aring o rior vii or viag. BOJ F JY Jaan IO S $ S IO Jaan young or S young or IO wa in an 2 wi y nra ank. 50