Category Archives: Notes

Arguments for Interest Paying, Account Based, CBDC

In an NBER working paper and a column on VoxEU, Michael Bordo and Andrew Levin make the case for central bank issued digital currency (CBDC).

Bordo and Levin favor an account-based CBDC system (managed or supervised by the central bank) rather than central bank issued tokens in the blockchain.

They emphasize the Friedman rule and the fact that interest paying CBDC affords the possibility to satisfy the rule:

These … goals – … a stable unit of account and an efficient medium of exchange – seemed to be irreconcilable due to the impracticalities of paying interest on paper currency, and hence Friedman advocated a steady deflation rather than price stability. But the achievement of both goals has now become feasible using a well-designed CBDC.

Interest paying CBDC would imply—payments to account holders. Bordo and Levin do not discuss the political economy implications. They are also silent about the transition from the current system with deposits to a new system with interest bearing CBDC in which demand for deposits would drastically fall.

Bordo and Levin favor abolishing cash to render monetary policy most powerful. Eliminating the option to withdraw cash would also eliminate the lower bound on nominal interest rates and would render unnecessary any “inflation buffer” of 2 percent or so. Monetary policy thus could move from positive inflation targets to a price level target.

Their paper contains a long list of useful references.


Utility Settlement Coin Skepticism

On Alphaville, Izabella Kaminska questions the utility settlement coin project (for an update on the project, see Martin Arnold’s recent FT article). She suspects that

USC isn’t really a blockchain project as much as a market infrastructure project — even if it leans on blockchain jargon for the purpose of gaining popular momentum. …

On paper, the technology promises to un-encumber cash collateral by creating a much more reliable form of distributed settlement, requiring a fraction of the collateral needed to operate a comparable centralised system.

She points to possible conflicts of interests. The project could just aim at convincing regulators that settlement processes are robust.

Hence most blockchain ventures today equate to nothing more than a lobbying effort by banks to get decentralized settlement approved again, ideally without any of the associated collateral headaches.

Can a USC-type project operate without support by the central bank? Kaminska says no since only the central bank can credibly monitor whether the promised backing of USC by base money actually is observed.

A Taxonomy of Money

In a BIS Quarterly Review article, Morten Bech and Rodney Garratt offer a taxonomy of money, with special emphasis given to central bank issued digital and crypto currency. They stress four dimensions:

issuer (central bank or other); form (electronic or physical); accessibility (universal or limited); and transfer mechanism (centralised or decentralised). The taxonomy defines a CBCC as an electronic form of central bank money that can be exchanged in a decentralised manner known as peer-to-peer, meaning that transactions occur directly between the payer and the payee without the need for a central intermediary. This distinguishes CBCCs from other existing forms of electronic central bank money, such as reserves, which are exchanged in a centralised fashion across accounts at the central bank.

Should a Central Bank Issue Cryptocurrency?

On Alphaville, Izabella Kaminska asks why a central bank would want to issue cryptocurrency rather than conventional digital currency.

… if anonymity is not the objective of issuing a centrally supervised cryptocurrency, what really is the point of using blockchain or crypto technology? Just issue a conventional digital currency and be done with it. If, on the other hand, anonymity is the objective of issuing a centrally supervised cryptocurrency, how can this be justified by a central bank in light of years of regulatory policy focused on making sure cashflows are more easily tracked and monitored … The idea it should be the central bank unwinding this trend is utterly bizarre.


… the only incentive central banks really have for introducing cryptocurrencies is in performing a giant monetary bait and switch. “Hey guys! We’re offering this amazing anonymous central bank currency which is as strong and stable as the dollar and yet just as anonymous as bitcoin!!! Come, all you illicit users of physical cash, come use our amazing new currency! We swear it’s absolutely anonymous and will never lead to prosecutions. Honest!!”

Her post relates to a recent BIS Quarterly Review article by Morten Bech and Rodney Garratt.

The Midlife Crisis

On VoxEU, David Blanchflower and Andrew Oswald argue that it exists.

Overall, we think there is a great deal of evidence – though we have critics, especially among a small group of social psychologists – that humans experience a midlife psychological ‘low’. The midlife decline in wellbeing is apparently substantial and not minor … It should perhaps be emphasised that the midlife low is not affected by regression-equation controls for having young children, nor by changing the exact nature of the dependent variable.

The Cost of Identity Theft

The Economist reports that according to estimates,

undoing identity fraud can take an average of six months and 100 to 200 hours of a person’s time.

In addition there is the risk of substantial financial losses due to identity fraud.

Suppose a data breach exposes personal information of 1 million people. As a consequence, 0.1% of the affected persons suffer financial costs of $100 each, and all affected persons spend 100 hours to undo the damage. Suppose the average wage of the affected population is $15 per hour. The data breach then costs $100’000 + $1’500’000’000, of which the latter component is a pure social loss.

Why do we move in the direction of more and more centralized data storage? Why do customers accept this? Why do some institutions, including “virtual” companies and specific government authorities do not manage to provide the same security as traditional banks which have been doing relatively well in this respect? Is differential data security priced?

ICOs and Frequent Flyer Miles

The Economist on “initial coin offerings:”

Many ICOs are designed to finance applications that will make use of the blockchain … In some cases, the “coins” can be exchanged for services on the site. In a way, this is like selling air miles in a startup airline; investors can either use the miles for flights or hope they can trade them at a profit. For the business, it is also a way of creating demand for the product they are selling.

But in plenty of cases, an ICO is just a way of raising capital without all the hassle of meeting regulatory requirements, or the burden of paying interest to a bank.

Desirable Features of Central Bank Issued Digital Currency

On bankunderground, Simon Scorer reminds us that a central bank issued digital currency (CBDC) need not operate on a distributed ledger platform. The two do not have much to do with each other.

Scorer suggests a series of technical requirements for a CBDC:

And he concludes that a distributed ledger does not meet all requirements.

It’s unlikely that all of the above attributes could be perfectly met with today’s technology; you may need to make compromises between features – e.g. the trade-off between resilience and privacy …

CBDC is far from just a simple question of technology; any central bank contemplating CBDC will need to answer a host of fundamental economic questions, as well as considering how feasible it is to achieve all the required features and what type of technology might enable this.

US Top Income Shares Rose Less Dramatically

That’s what Gerald Auten and David Splinter argue in a paper from last year.

… new estimates of top income shares using two consistent measures of income. Our measure of consistent market income includes full corporate profits and adjusts for changes from TRA86, including changes to the tax base and increased filing by dependent filers. In addition, we include employer paid payroll taxes and health insurance and adjust for falling marriage rates. The effect of these adjustments on estimated top income shares are dramatic. Using a consistent measure of market income shows that the increase in income shares of the top one percent since 1979 is about half of the PS unadjusted estimate. The increase since 1960 is about one-quarter of the unadjusted estimate. Moreover, our measure of broad income that includes government transfers reduces the top one percent share increase to one-tenth of the unadjusted estimate.

But in an NBER working paper, Annette Alstadsaeter, Niels Johannesen, and Gabriel Zucman argue that tax evasion and offshore wealth holdings work in the opposite direction:

Because offshore wealth is very concentrated at the top, accounting for it increases the top 0.01% wealth share substantially in Europe, even in countries that do not use tax havens extensively. It has considerable effects in Russia, where the vast majority of wealth at the top is held offshore. These results highlight the importance of looking beyond tax and survey data to study wealth accumulation among the very rich in a globalized world.

Distributed-Ledger Based Payment Systems Could Work

The ECB has published a first report on Stella, a joint research project with the Bank of Japan. The two banks are interested in potential roles that distributed ledger technology could play to support the financial market infrastructure. The report assesses whether existing payments systems could be safely and efficiently run on a distributed ledger. It concludes that

  • a distributed-ledger-based system could meet the performance needs of real-time gross settlement systems, up to some limits;
  • such a system could strengthen resilience.

Why India’s Demonetization Didn’t Work as Expected

On his blog, JP Koning offers two explanations for the surprisingly high rupee notes redemption rate—nearly 99%—after last year’s demonetization experiment: Money laundering, and a partial amnesty.

Indians who had large quantities of illicit cash were able to contract with those who had room below their ceiling to convert illicit rupees on their behalf …

Two weeks after the initial … announcement, the government introduced a formal amnesty for demonetized banknote holders. Any deposit of cash above the ceiling would only be taxed at 50%, assuming it was declared. If not declared, the funds might still get through the note blockade undetected, although if apprehended an 85% penalty was to be levied. These new options were better than throwing away one’s stash altogether and suffering a sure 100% loss …

As a consequence, the windfall for the government likely was smaller than expected. But poorer Indians may still have benefited, by selling their services in the money laundering scheme.

Babylonian Trigonometry, Ahead of Its Time By Thousands of Years

In Historia Mathematica, Daniel Mansfield and N.J. Wildberger argue that Plimpton 322, the Old Babylonian tablets, served as an exact ratio-based trigonometric table.

… Instead, P322 is a trigonometric table of a completely unfamiliar kind and was ahead of its time by thousands of years.

… we must adopt two ideas that are unique to the mathematical culture of the Old Babylonian (OB) period, between the 19th and 16th centuries B.C.E.

First we abandon the notion of angle, and instead describe a right triangle in terms of the short side, long side and diagonal of a rectangle. Second we must adopt the OB number system and its emphasis on precision. The OB scribes used a richer sexagesimal (base 60) system which is more suitable for exact computation than our decimal system, and while they were not shy of approximation they had a preference for exact calculation. …

If this interpretation is correct, then P322 replaces Hipparchus’ ‘table of chords’ as the world’s oldest trigonometric table — but it is additionally unique because of its exact nature, which would make it the world’s only completely accurate trigonometric table. These insights expose an entirely new level of sophistication for OB mathematics.

The Uerdingen Line Replaces The Wall

The Economist discusses the North-South divide in Germany which increasingly replaces the East-West division. The Southern states (Saarland, Rhineland-Palatinate, Hesse, Baden-Württemberg, Bavaria, Thuringia, Saxony) do better along many dimensions.

Germans in the southern states … go to better schools, get jobs more easily, earn more and live longer to enjoy it. Their governments have healthier finances, so they can invest more … crime rates are “strikingly” lower in the south.


Long-Term Real Rates of Return

More from the recent working paper by Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan Taylor (“The Rate of Return on Everything, 1870–2015“). (Previous blog post about the return on residential real estate.)

  • Return data for 16 advanced economies over nearly 150 years …
  • …on the income and capital gains (and thus, total returns) from equities, residential housing, government bonds, and government bills.
  • Real returns average 7% p.a. for equity, 8% for housing, 2.5% for bonds, and 1% for bills.
  • Housing returns are much less volatile than equity returns.
  • Real interest rates have been volatile over the long-run, sometimes more so than real risky returns. Real interest rates peaked around 1880, 1930, and 1990. Current low real interest rates are “normal.”
  • Risk premia have been volatile, but at lower than business cycle frequencies.
  • r − g is rather stable in the long run and always positive. The difference rose during the end of the 19th and 20th century.


The Residential Real Estate Premium (Puzzle)

On Alphaville, Matthew Klein discusses recent work by Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan Taylor (“The Rate of Return on Everything, 1870–2015“) according to which

Residential real estate, not equity, has been the best long-run investment over the course of modern history.

… but they didn’t calculate the returns most homeowners actually experience. Most people borrow to buy housing and most people live in their properties without renting them out. This makes a big difference.

… Net rental income has historically accounted for half of the total returns from owning housing. It’s also far less volatile, dramatically boosting the Sharpe ratio compared to what you would get just by looking at changes in house prices.

Housing has beaten stocks since 1950 because rental income has been better than dividend income, not because house prices have grown more than stock prices.

German Federal Constitutional Court vs. European Central Bank

In the FT, Claire Jones reports about the German Federal Constitutional Court’s decision to refer a case against the European Central Bank’s PSPP program to the European Court of Justice.

“In the view of the [court] significant reasons indicate that the ECB decisions governing the asset purchase programme violate the prohibition of monetary financing and exceed the monetary policy mandate of the European Central Bank.” …

While Germany’s constitutional court said the OMT programme was legal, it stipulated, based on an earlier ECJ judgment, that bond purchases had to meet a number of requirements. On Tuesday the Karlsruhe-based court said there were “several factors” to indicate that one of these requirements — that bonds must be purchased on secondary markets and not directly from governments — was being violated under QE.

From the court’s statement:

… any programme relating to the purchase of government bonds on the secondary market must provide sufficient guarantees to effectively ensure observance of the prohibition of monetary financing. The Senate presumes that the Court of Justice of the European Union deems the conditions which it developed, and which limit the scope of the ECB policy decision on the Outright Monetary Transactions (OMT) programme of 6 September 2012, to be legally binding criteria. Against that background, the Senate further presumes that contempt of these criteria would amount to a violation of competences also with regard to other programmes relating to the purchases of government bonds.

… several factors indicate that the PSPP decision nevertheless violates Art. 123 AEUV, namely the fact that details of the purchases are announced in a manner that could create a de facto certainty on the markets that issued government bonds will, indeed, be purchased by the Eurosystem; that it is not possible to verify compliance with certain minimum periods between the issuing of debt securities on the primary market and the purchase of the relevant securities on the secondary market; that to date all purchased bonds were – without exception – held until maturity; and furthermore that the purchases include bonds that carry a negative yield from the outset.

… the PSPP decision can no longer be qualified as a monetary policy measure but instead must be deemed to constitute a measure that is primarily of an economic policy nature.

… the ECB Governing Council may be able to modify the rules on risk sharing within the Eurosystem in a way that would result in risks for the profit and loss accounts of the national central banks and also threaten the overall budgetary responsibility of national parliaments. Against that background, the question arises whether an unlimited distribution of risks between the national central banks of the Eurosystem regarding bonds in default where such bonds were issued by central governments or by issuers of equivalent status would violate Art. 123 and Art. 125 TFEU as well as Art. 4(2) TEU (in conjunction with Art. 79(3) GG).

Previous, related post.

Economics Journals’ Response Times

In a blog post, Douglas Campbell offers a ranking of economics journals by response times (based on non-representative data). The ranking (with # indicating the rank according to citations):

#    Journal Name    Accept %    Desk Reject %    Avg. Time    Median Time    25th Percent. (Months)    75th Percent. (Months)    N =
1    Quarterly Journal of Economics    1%    62%    0.6    0    0    1    71
12    Journal of the European Economic Association    4%    56%    1.2    0.5    0    2    25
14    Journal of Human Resources    18%    58%    1.3    1    0    2    38
6    American Economic Journal: Applied Economics    3%    33%    1.6    2    0    2.5    36
31    European Economic Review    29%    50%    1.6    1    0    3    34
15    Review of Financial Studies    15%    20%    1.8    2    1    2    20
13    American Economic Journal: Economic Policy    7%    40%    1.8    2    0    3    30
42    IZA Journal of Labor Economics    100%    0%    2.0    2    2    2    1
39    Journal of Financial and Quantitative Analysis    33%    7%    2.1    2    1    3    15
44    Journal of Law and Economics    0%    42%    2.1    2    0.5    3    12
17    Journal of Economic Growth    0%    0%    2.1    2    2    3    7
27    Journal of Financial Intermediation    14%    29%    2.1    3    1    3    7
7    Journal of Finance    0%    32%    2.2    2    0    4    19
16    Economic Journal    20%    46%    2.2    2.5    0    4    41
19    Journal of Financial Economics    29%    21%    2.2    2    1    3    14
34    Journal of Health Economics    14%    57%    2.3    2    0.5    4    28
38    Journal of Population Economics    29%    43%    2.3    3    0    4    7
5    American Economic Journal: Macroeconomics    11%    26%    2.3    2    0    4    19
32    Theoretical Economics    8%    0%    2.3    2    2    2.5    12
49    Econometrics Journal    0%    60%    2.4    0    0    5    5
9    American Economic Review    7%    45%    2.4    2    0    4    71
45    Review of Finance    0%    9%    2.5    3    2    3    11
26    Journal of Urban Economics    19%    19%    2.5    3    1    4    16
35    Labour Economics    12%    35%    2.5    2    1    3    17
24    Journal of Applied Econometrics    0%    42%    2.6    2    0    5    19
4    Econometrica    4%    25%    2.9    3    1    4    24
30    American Economic Journal: Microeconomics    23%    15%    2.9    3    2    4    13
3    Review of Economic Studies    3%    37%    3.1    3    0    5    63
21    Journal of Public Economics    8%    25%    3.2    3    1    4    51
36    World Bank Economic Review    0%    50%    3.4    3    1.5    6    8
11    Journal of Labor Economics    0%    20%    3.5    4    2    6    15
43    Journal of Risk and Uncertainty    0%    75%    3.8    3.5    3    4.5    4
10    Review of Economics and Statistics    2%    50%    3.8    2    0    6    50
23    Journal of Development Economics    14%    33%    3.8    3    1    5    36
25    Journal of Business and Economic Statistics    22%    11%    3.9    3    2    5    9
41    Journal of Environmental Economics and Management    24%    10%    4.0    3.5    2    5    21
22    RAND Journal of Economics    7%    15%    4.1    4    4    5    27
47    Journal of Economic Dynamics and Control    50%    17%    4.2    3    1    4    18
33    Journal of Economic Theory    17%    13%    4.2    4    3    5.5    23
46    Journal of International Money and Finance    41%    6%    4.4    3    2    6    17
50    Oxford Bulletin of Economics and Statistics    23%    38%    4.6    4    2    6    13
2    Journal of Political Economy    0%    60%    4.8    3    1.5    7    25
18    Journal of International Economics    19%    6%    4.8    3.5    2.5    6.5    16
20    Journal of Money, Credit, and Banking    20%    15%    5.1    4    2    8    20
40    Journal of Economic Surveys    0%    40%    5.2    5    0    7    5
28    Experimental Economics    29%    14%    5.9    6    3    9    7
29    Journal of Econometrics    11%    11%    7.0    7    5    10    9
48    Econometric Theory    0%    0%    7.0    5    4    12    3
8    Journal of Monetary Economics    21%    0%    7.7    4    3    9    14

Say’s Law

From The Economist’s economics brief on Say’s Law:

Supply gives people the ability to buy the economy’s output. But what ensures their willingness to do so? According to the logic of Say and his allies, people would not bother to produce anything unless they intended to do something with the proceeds. … Even if people chose to save not consume the proceeds, Say was sure this saving would translate faithfully into investment in new capital …

But what if the sought-after thing was [money] … as a store of value, to be held indefinitely? A widespread propensity to hoard money posed a problem for Say’s vision. It interrupted the exchange of goods for goods on which his theory relied. … And if, as he had argued, an oversupply of some commodities is offset by an undersupply of others, then by the same logic, an undersupply of money might indeed entail an oversupply of everything else.

Say recognised this as a theoretical danger, but not a practical one.