“Tractable Epidemiological Models for Economic Analysis,” CEPR, 2020

CEPR Discussion Paper 14791, May 2020, with Martin Gonzalez-Eiras. PDF (local copy).

We contrast the canonical epidemiological SIR model due to Kermack and McKendrick (1927) with more tractable alternatives that offer similar degrees of “realism” and flexibility. We provide results connecting the different models which can be exploited for calibration purposes. We use the expected spread of COVID-19 in the United States to exemplify our results.

Debt Monetization

On VoxEU, Refet Gürkaynak and Deborah Lucas argue in favor of helicopter drops to finance the fiscal burden due to Covid-19 and they propose an elegant way to implement such drops without undermining the central bank’s equity position (if regulators accept accounting tricks).

The special issue bonds would be zero coupon perpetuities and therefore would not obligate Treasury to any future payments. The legislation would require the Fed to buy these bonds from the banks at par. The bonds would then remain on the Fed’s balance sheet indefinitely. This monetises the special issue bonds.

Censorship Resistant Payment Technologies

On Coin Center’s blog, Matthew Green and Peter van Valkenburgh write:

Censorship resistance is the only way to guarantee that a digital asset truly is “bearer” and can be sent directly from one person to another without reliance on a third party. Cryptocurrencies achieve this property by making network participants (miners) compete for the power to add transactions to the ledger. Even if some miners wish to censor a transaction, we assume that others will not, particularly if it means they are forgoing fee revenue. A centralized digital dollar would not have competitive mining but if the role of the ledger-keeper was reduced to verifying zero-knowledge proofs then any refusal to perform that verification risks indiscriminately censoring users throughout the economy. If the Treasury became corrupt, it could degrade the performance of the network system-wide, but it would be difficult to selectively block certain individuals or surveil their activities.

None of these protections, however, are guaranteed, and new technologies always present unpredictable risks and unintended consequences. We must, therefore, preserve and defend physical cash and should never celebrate its demise. Cash, along with cryptocurrencies, is essential as a payment method of last resort that cannot be surveilled or controlled by corrupt governments or unscrupulous corporations.

The German Constitutional Court’s May 5, 2020 Verdict

The court’s press release: Beschlüsse der EZB zum Staatsanleihekaufprogramm kompetenzwidrig.

Critical discussion on Verfassungsblog by Alexander Thiele.

Critical Twitter thread by Jean-Pierre Landau.

Corinna Budras in the FAZ:

Viel größer sind die Bedenken über Kompetenzstreitigkeiten, die nun von Polen oder Ungarn angeführt werden könnten. Das wissen auch die Bundesverfassungsrichter, die diese Kritik in ihrem Urteil schon vorwegnehmen: Nur in absoluten, eng begrenzten Ausnahmefällen sei sie möglich, nämlich dann, wenn ein ausbrechender Rechtsakt” vorliege, der dazu führe, dass sich eine europäische Institution neue Kompetenzen schaffe, die ihr niemals übertragen worden seien und der deutsche Bürger dadurch in seinen Grundrechten verletzt werde. Konkret bedeutet das: Wenn sich Europa so ausbreitet, dass der demokratisch gewählte Bundestag nichts mehr zu sagen hat, steht das Bundesverfassungsgericht Gewehr bei Fuß.

Martin Wolf in the FT:

What can be done? … Or, the decision could be ignored. If a German court can ignore the ECJ, maybe the Bundesbank can ignore that court. … The EU could initiate an infringement proceeding against Germany. But its direct target would be the German government, which is caught between the EU organs on the one hand and the court on the other.

In the SZ, Wolfgang Janisch and Stefan Kornelius summarize an interview with one of the judges, Peter Michael Huber:

“Der Satz der Kommissionspräsidentin von der Leyen, das Europarecht gelte immer und ohne jede Einschränkung, ist, so gesehen, falsch”, sagte Huber in einem Interview der Süddeutschen Zeitung. “Auch die anderen Mitgliedstaaten kennen äußerste, an ihre Verfassungsidentität anknüpfende Grenzen, wo sie den Vorrang der nationalen Verfassungen vor dem Europarecht postulieren.” Das betreffe aber nur einen winzigen Teil des EU-Rechts.

… “Von der EZB verlangen wir nur, dass sie vor den Augen der Öffentlichkeit ihre Verantwortung übernimmt und auch begründet – auch gegenüber den Leuten, die Nachteile von ihren Maßnahmen haben.” Weder verlange das Gericht, das Anleihekaufprogramm zu unterlassen, noch mache es inhaltliche Vorgaben. “Wir wollen nur einen Nachweis, dass das noch innerhalb ihres Mandats ist.”

Nach Hubers Worten könnte man etwa eine Begründungspflicht in die EZB-Satzung aufnehmen. Und das Verhältnis zum EuGH ließe sich durch einen Mechanismus zur Konfliktschlichtung entschärfen. “Das Vernünftigste wäre, den Ball flach zu halten und zu überlegen, ob unser Urteil nicht doch ein paar richtige Punkte enthält.”

Michael Rasch in the NZZ:

Die Verfassungsrichter vermissten besonders eine Prüfung der Verhältnismässigkeit durch den EuGH. Die Luxemburger Richter hatten, wie auch die deutschen Verfassungsrichter, von der EZB die Verhältnismässigkeit der Massnahmen eingefordert, diese aber eben nicht analysiert.

On German TV, Frank Bräutigam interviews Andreas Voßkuhle.

(Updated repeatedly.)

China’s Digital Renminbi

In the NZZ, Matthias Müller reports how China’s CBDC plans progress:

In China beginnen nun im Viertel Xiangcheng, das zu der unweit von Schanghai gelegenen Millionenstadt Suzhou gehört, in einem geschlossenen System erste Tests. …

Die PBoC dürfte ein zweistufiges System entwickelt haben. Auf der ersten Ebene wird die digitale Währung an die Geschäftsbanken ausgegeben. Auf der zweiten Ebene können dann die Haushalte und Unternehmen den digitalen Yuan abheben und verwenden. …

In Suzhou werden im April in einem ersten Schritt die digitalen Geldbeutel auf die Smartphones ausgewählter Testpersonen aufgespielt, wobei es sich um Angehörige des öffentlichen Diensts handelt.

“On the Optimal ‘Lockdown’ during an Epidemic,” CovEc, 2020

Covid Economics, April 2020, with Martin Gonzalez-Eiras. PDF.

We embed a lockdown choice in a simplified epidemiological model and derive formulas for the optimal lockdown intensity and duration. The optimal policy reflects the rate of time preference, epidemiological factors, the hazard rate of vaccine discovery, learning effects in the health care sector, and the severity of output losses due to a lockdown. In our baseline specification a Covid-19 shock as currently experienced by the US optimally triggers a reduction in economic activity by two thirds, for about 50 days, or approximately 9.5 percent of annual GDP.

Libra 2.0

What’s left? The new plans envision

  • Several stablecoins tied to existing fiat currencies rather than (or in addition to) to the originally planned currency basket.
  • No more “permissionless” transactions, no more “censorship resistance.”
  • Vetting of new wallets by the operator (KYC, AML).

The new Libra White Paper.
Teunis Brosens and Carlo Cozucco in ING’s THINK.
Kiran Stacey and Hannah Murphy in the FT.
Philip Sandner and Jonas Gross in Medium.
Updated (April 25): Eichengreen and Viswanath-Natraj on VoxEU.

 

“On the Optimal ‘Lockdown’ during an Epidemic,” CEPR, 2020

CEPR Discussion Paper 14612, April 2020, with Martin Gonzalez-Eiras. PDF (local copy).

We embed a lockdown choice in a simplified epidemiological model and derive formulas for the optimal lockdown intensity and duration. The optimal policy reflects the rate of time preference, epidemiological factors, the hazard rate of vaccine discovery, learning effects in the health care sector, and the severity of output losses due to a lockdown. In our baseline specification a Covid-19 shock as currently experienced by the US optimally triggers a reduction in economic activity by two thirds, for about 50 days, or approximately 9.5 percent of annual GDP.

Medical Specialist Condemns Swiss Covid-19 Preparations and Response

In Die Mittelländische Zeitung, a Swiss doctor criticizes Switzerland’s preparations and response to Covid-19. He points to

  • Lack of preparation by political decision makers
  • Misleading communication by federal health officials
  • Their apparent lack of awareness of academic work on the topic
  • Arrogance in Switzerland and the West vis-à-vis China and other far eastern countries
  • Sensationalist scare mongering in the media
  • Calls for systematic infection of groups that are less at risk

Informative as far as medical aspects are concerned. Not convincing when criticizing statistical approaches to grasping the problem. Questionable as far as ex-post validation of eight studies and calls for action are concerned.

Deaths Per Capita versus Confirmed Cases Per Capita

Data from April 6, 2020.

Iceland and Luxembourg have many more confirmed cases per capita than other countries (either because they have more cases or better information). Mortality per confirmed case is highest in Italy, Spain, France, Belgium, Netherlands, UK.

Source: Author’s calculations based on Johns Hopkins data and World Bank data.

“Wirtschaftspolitik angesichts von Covid-19: Lastenteilung, aber keine Preismanipulationen (Economic Policy Responses to Covid-19: Burden Sharing, But no Price Distortions),” ÖS, 2020

Ökonomenstimme, 3 April 2020. HTML. Shorter version published in NZZ.

The aggregate Covid-19 shock calls for transfers of the type a pandemic insurance would have brought about. But we must not distort relative prices. They have to reflect scarcity, to provide incentives to overcome it. (This applies within countries but also across.)

“Preise müssen sich frei bilden können (Prices Must Reflect Scarcity),” NZZ, 2020

NZZ, 2 April 2020. PDF.

The aggregate Covid-19 shock calls for transfers of the type a pandemic insurance would have brought about. But we must not distort relative prices. They have to reflect scarcity, to provide incentives to overcome it. (This applies within countries but also across.)

Switzerland Peps Up SMEs

How Switzerland peps up SMEs: Banks are encouraged to extend credit (at 0%). The treasury guarantees the loans. The SNB refinances banks and accepts the guaranteed loans as collateral. Fast and efficient. Eventually, some of these loans will turn into grants of course. But that’s ok; the first-best response to a shock with asymmetric effects does involve transfers if markets are incomplete.

Data and Research on the Coronavirus

The first of a long sequence of nice papers on the virus by economists are out:

  • Martin Eichenbaum, Sergio Rebelo, and Mathias Trabandt (2020), The Macroeconomics of Epidemics. NBER wp 26882. (My comments on Twitter.)
  • James Stock (2020), Coronavirus Data Gaps and the Policy Response to the Novel Corona Virus. Mimeo. Conclusion: There is an urgent need to reliably estimate the asymptomatic rate—the share among the infected who do not show strong symptoms.

For more recent papers, see for example CEPR’s Covid Economics: Vetted and Real-Time Papers.

Data:

Estimates and forecasts:

Oxford University’s government response tracker.

Coronavirus link database.

Updated: March 26, April 26, …

Coronavirus: The Hammer and the Dance

An excellent article written by Tomas Pueyo and published on Medium.

Summary of the article: Strong coronavirus measures today should only last a few weeks, there shouldn’t be a big peak of infections afterwards, and it can all be done for a reasonable cost to society, saving millions of lives along the way. If we don’t take these measures, tens of millions will be infected, many will die, along with anybody else that requires intensive care, because the healthcare system will have collapsed.

… Here’s what we’re going to cover today, again with lots of charts, data and models with plenty of sources:

  1. What’s the current situation?
  2. What options do we have?
  3. What’s the one thing that matters now: Time
  4. What does a good coronavirus strategy look like?
  5. How should we think about the economic and social impacts?

When you’re done reading the article, this is what you’ll take away:

  • Our healthcare system is already collapsing.
  • Countries have two options: either they fight it hard now, or they will suffer a massive epidemic.
  • If they choose the epidemic, hundreds of thousands will die. In some countries, millions. And that might not even eliminate further waves of infections.
  • If we fight hard now, we will curb the deaths.
  • We will relieve our healthcare system.
  • We will prepare better.
  • We will learn.
  • The world has never learned as fast about anything, ever.
  • And we need it, because we know so little about this virus.
  • All of this will achieve something critical: Buy Us Time.

If we choose to fight hard, the fight will be sudden, then gradual. We will be locked in for weeks, not months. Then, we will get more and more freedoms back. It might not be back to normal immediately. But it will be close, and eventually back to normal. And we can do all that while considering the rest of the economy too.

Marshall Islands CBDC

The Marshall Islands CBDC project moves forward. Algorand, the project partner, reports that

blockchain for the world’s first national digital currency, the Marshallese sovereign (SOV), will be built using Algorand technology. The SOV will circulate alongside the US dollar and help the Marshall Islands efficiently operate in the global economy.

Coronavirus: Effects on Course Program in Gerzensee

The Central Bankers Course ”Monetary Policy, Exchange Rates, and Capital Flows” has been postponed to 2021.

Doctoral courses currently take place as usual, subject to the following restrictions:

  • Participants are not allowed to attend Study Center Gerzensee events nor enter the Center’s premises for 14 days after returning from areas where the Coronavirus has spread. As of 2 March 2020, these areas are China, South Korea, Singapore, Iran, and Northern Italy defined as Tuscany, Emilia-Romagna and all other Italian regions further north.
  • Participants with symptoms of any mild or severe sickness are not allowed to attend Study Center Gerzensee events nor to check in at the Study Center.
  • Participants who experience symptoms after check in must stay in their hotel room and wait for instructions by local authorities.

On the Future of Payments and Settlement

In its Quarterly Review, the BIS offers nice perspectives on the future of payments. Morten Bech and Jenny Hancock survey innovations in payments, and where the problems lie. Tara Rice, Goetz von Peter and Codruta Boar examine the fall in the number of correspondent banks. Morten Bech, Umar Faruqui and Takeshi Shirakami discuss cross border payments. Morten Bech, Jenny Hancock, Tara Rice and Amber Wadsworth discuss securities settlement. And Raphael Auer and Rainer Böhme explore design choices of a retail CBDC.

e-krona Pilot

The Riksbank starts a pilot project with Accenture to develop a technical solution for a retail e-krona.

Users shall be able to hold e-kronor in a digital wallet, make payments, deposits and withdrawals via a mobile app. The user shall also be able to make payments via wearables, such as smart watches, and cards.

The pilot runs for a year, on a distributed ledger, according to the Riksbank’s press release. More detailed information is contained in this note.

 

 

 

“Цифровые деньги и цифровые валюты центральных банков: главное, что нужно знать,” Econs, 2020

Econs (a non-profit project of the communications department of the Russian central bank), February 13, 2020. HTML.

Russian version of my VoxEU column on digital money and CBDC. What are we actually talking about? What do we know? And what should policymakers do? I discuss the following points:

  • Finance has been digital forever – what’s new about ‘digital money’?
  • Does the nature of money change?
  • What is central bank digital currency?
  • What is the link between CBDC and the blockchain?
  • Would CBDC have macroeconomic effects?
  • Would CBDC foster bank disintermediation and bank runs?
  • Why consider CBDC at all?
  • What opportunities does CBDC offer?
  • Where do the risks lie?
  • Do the opportunities justify the risks?
  • Do central banks have a choice?