I offer a macroeconomic perspective on the “Reserves for All” (RFA) proposal to let the general public use electronic central bank money. After distinguishing RFA from cryptocurrencies and relating the proposal to discussions about narrow banking and the abolition of cash I propose an equivalence result according to which a marginal substitution of outside for inside money does not affect macroeconomic outcomes. I identify key conditions on bank and government (central bank) incentives for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate my analysis to common arguments in the discussion about RFA and point to inconsistencies and open questions.
This paper reviews theoretical results on financial policy. We use basic accounting identities to illustrate relations between gross assets and liabilities, net debt positions and the appropriation of (primary) budget surplus funds. We then discuss Ramsey policies, answering the question how a committed government may use financial instruments to pursue its objectives. Finally, we discuss additional roles for financial policy that arise as a consequence of political frictions, in particular lack of commitment.
On his blog, Dani Rodrik argues that
the fact that an international rule is negotiated and accepted by a democratically elected government does not inherently make that rule democratically legitimate.
Rodrik distinguishes two types of international commitments. On the one hand, there are commitments that help to overcome time-inconsistency problems.
[For example, the government] would like to commit to free trade or to fiscal balance, but realizes that over time it will give in to pressure and deviate from what is its optimal policy ex ante. So it chooses to tie its hands through external discipline. This way, when protectionists and big spenders show up at its door, the government says: “sorry, the WTO or the IMF will not let me do it.” Everyone is better off, save for the lobbyists and special interests. This is the good kind of delegation and external discipline.
On the other hand, there are commitments that mainly serve to tie the hands of current or future political opponents.
From an ex-ante welfare standpoint, this strategy has much less to recommend itself. The future government may have better or worse ideas about government policy, and it is not clear that restricting its policy space is a win-win outcome. This kind of external discipline has much less democratic legitimacy because, once again, it privileges one set of interests against others.
In an earlier contribution, I have argued that a key role of the European Union should be to play the former role.
In the FT, Richard Waters reports about the advent of the automated company.
The DAO — an acronym of decentralised autonomous organisation, the name given to such entities — has been set up to invest in other businesses, making it a form of investor-directed venture capital fund. … The organisation is governed by a set of so-called smart contracts which run on the Ethereum blockchain, a public ledger designed to make its operations transparent and enforceable.
In other words, the code provides a commitment mechanism. Imagine a world where government interventions can be encoded in a similar way. This could open the way for solving a central problem of democratic societies: The time inconsistency of optimal government plans.
The public’s perception of central banks has changed during the crisis—and has created expectations that cannot be met. Beyond the buzzwords, the fundamental options for monetary policy makers are the same as always.
Fiscal union proposals are not convincing:
- Enforcement should be key but remains weak.
- Monitoring and counteracting of “imbalances” is dubious.
- Subsidiarity is important.
PS: In the FT (October 18), Wolfgang Münchau reaches a similar conclusion albeit from a different starting point: “Better no fiscal union than a flawed one.”
The collapse in Greece is a consequence of major institutional problems:
- Political decision makers in Berlin, Paris, Brussels, Frankfurt and Washington didn’t follow the rules. This seemed optimal ex post, but is suboptimal ex ante (see Kydland and Prescott).
- The ECB’s mandate is unclear.
- The monetary system is fragile.