Monetary Policy for Conventional Times: What Toolkit for the Future?
Sunday, Jan. 8, 2023 8:00 AM - 10:00 AM (CST)
- Chair: Huw Pill, Bank of England
New Digital Currency (CBDC) Monetary Policy Tool to Stop Inflation Without Causing a Recession
AbstractDon't repeat our historically dysfunctional approach to stopping excessive price inflation. When the Federal Reserve raises interest rates, it becomes harder for businesses to borrow, which causes businesses to cut hours, lay off workers and close outlets. This is an indirect and rather brutal way to reduce demand for goods and services that also reduces supply. During an inflation, we need more supply, not less. Raising loan rates just shifts money away from housing and auto loans to other products. To avoid cash being eaten up by inflation, people spend faster. As recession looms, most banks make fewer loans and lower their rates on savings. People can’t find a safe and secure place to put their money. We don't need to exclusively rely on the stick of a Wall Street cost-of-borrowing tool that punishes the poor to reduce inflation, when a central-bank-digital-currency (CBDC) could offer the carrot of a return-on-savings tool to directly reduce consumer demand on Main Street. Offering a high interest rate on savings to get people to save more and spend less will reduce consumer demand during an inflation. Sure, suppressing business to lay off workers to reduce demand will work if you slam on the brakes hard enough. But trashing the economy to stop inflation is not necessary. A more direct, more efficient, and more effective way to stop inflation is possible by creating Federal Reserve digital currency bank accounts for everyone. We all have physical currency, but only the largest banks have Federal Reserve digital currency accounts. Ledgers for unsupervised digital currencies require a blockchain, but private banks and governments provide direct authority and responsibility for issuing digital money. The Federal Reserve issuing a digital currency means allowing anyone and everyone to have an account with the Federal Reserve as long as they have US dollars to create and maintain their account. But the danger is that the Fed offering a high enough interest rate on savings to curb inflation could divert enormous amounts of money from private banks and Wall Street. To prevent this, the accounts eligible for the high positive interest rate would be those with a Social Security number (to be given to every US child at birth) and only applied to amounts of $10,000 or less. Accounts without a Social Security number and any amounts above $10,000 would have a negative interest rate. Getting people to save more and spend less is exactly what is needed during an inflation. Bank and nonbank intermediaries would be paid a fee for providing access to your CBDC bank account ("FedAccount") via your computer or smartphone making it easier to transfer money. If someone cuts your grass, rakes your leaves, or shovels your snow, you can pay them easily with a smartphone-to-smartphone transfer between individual Federal Reserve CBDC accounts. This instant clearing would eliminate transaction time and expense. Alternatively, when inflation is low and unemployment rises, the Federal Reserve could lower the CBDC interest rates on both savings and small loans to stimulate the economy.
Fintech, Market Power and Monetary Transmission
AbstractUsing automobile credit data, we study individual lenders' responses to monetary policy shocks and how they are affected by local market power. We find that all lenders, except new fintech firms, respond to an increase in the policy rate by significantly increasing their rates on auto loans, and their loan originations contract as a result. However, the magnitude varies across lenders, borrowers, and markets. Our results suggest that the rising market power of shadow banks significantly increases banks' responses to the rate hike. The results are robust using cross-sectional variation and an event study approach that exploits the rise of fintech as a quasi-exogenous shock.
The Fiscal Channel of Quantitative Easing
AbstractFiscal surpluses/deficits must balance out the losses/gains generated by Quantitative Easing (QE). The general equilibrium effects of QE critically depend on how this fiscal adjustment is made. Following Wallace (1981), it is commonly assumed that only lump-sum taxes are adjusted, making QE irrelevant. We deviate from this premise. When governments also adjust public spending or (distortionary) taxes, QE
changes the real allocation of resources. As a result, forward-looking agents adjust their savings-consumption choice, influencing aggregate demand and asset prices. This is the QE’s fiscal channel. We show that adjusting spending is optimal in relevant environments, including Wallace’s one. Finally, we exploit this channel to show that a targeted QE, such as Green Corporate Bond Programs or the Transmission
Policy Instrument, acts as a redistributive and risk-sharing device.
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
- G1 - Asset Markets and Pricing