Author Archives: Dirk Niepelt

“Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics,” CEPR, 2020

CEPR Discussion Paper 15457, November 2020. PDF (local copy).

We analyze policy in a two-tiered monetary system. Noncompetitive banks issue deposits while the central bank issues reserves and a retail CBDC. Monies differ with respect to operating costs and liquidity. We map the framework into a baseline business cycle model with “pseudo wedges” and derive optimal policy rules: Spreads satisfy modified Friedman rules and deposits must be taxed or subsidized. We generalize the Brunnermeier and Niepelt (2019) result on the macro irrelevance of CBDC but show that a deposit based payment system requires higher taxes. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.

The Value of Monetary Units, 1500–1914

K. Kıvanç Karaman, ¸Sevket Pamuk, Seçil Yıldırım-Karaman (2020), Money and monetary stability in Europe, 1300–1914, Journal of Monetary Economics (115).

At one extreme, the Dutch Republic depreciated its monetary unit by about 2.3 times, at the other, the Ottomans depreciated by about 25,000 times. These two numbers correspond to average annual depreciation rates of 0.2 and 2.5% respectively, with the other states falling in-between. … depreciations tended to be episodic. In particular, long periods of constant silver and gold value alternated with episodes of rapid depreciation in consecutive years. … There were also instances of one-off depreciations, but they were few, and at low rates. … monetary stability was not an elusive objective. Some states stabilized their monetary unit early. England did so by the mid-16th century, except for the fiat standard episode during the Napoleonic wars. Dutch Republic stabilized its monetary unit in the early 17th century, with very minor changes in the centuries that followed. France stabilized its monetary unit in 1795 following the fiat money experiment of the Revolution. In contrast to these western European states, in southern and eastern Europe, states continued to depreciate their monetary units until the end of the period.

Central Banks Have Accepted a Future Retail CBDC

Recent indications:

Related recent developments:

“Dynamic Tax Externalities and the U.S. Fiscal Transformation,” JME, 2020

Journal of Monetary Economics, with Martin Gonzalez-Eiras. PDF. (Appendix: PDF.)

We propose a theory of tax centralization in politico-economic equilibrium. Taxation has dynamic general equilibrium implications which are internalized at the federal, but not at the regional level. The political support for taxation therefore differs across levels of government. Complementarities on the spending side decouple the equilibrium composition of spending and taxation and create a role for inter governmental grants. The model provides an explanation for the centralization of revenue, introduction of grants, and expansion of federal income taxation in the U.S. around the time of the New Deal. Quantitatively, it accounts for approximately 30% of the federal revenue share’s doubling in the 1930s, and for the long-term increase in federal grants.

Economic Aspects of the Energy Transition

In an NBER working paper, Geoffrey Heal discusses some aspects of the energy transition to come.

On infrastructure investments:

the likely net investment required to go carbon-free is now as little as $0.179 trillion

renewable power from wind and solar PV plants is now less expensive than power from gas, coal or nuclear plants … If it were not for the intermittency of renewables, we would save money by converting to clean power.

the social benefits from stopping the CO2 emissions from coal and gas in power generation in the U.S. amount to $200bn annually, roughly an order of magnitude greater than the costs. Furthermore, these benefits will continue for ever, whereas the costs are fully paid by 2050. … As greenhouse gases are a global public bad, many of these benefits will accrue to countries other than the U.S.

Carbon taxes only delay the extraction of fossil fuels except for those fuels whose marginal extraction cost is sufficiently high such that extraction cost plus tax exceeds the cost of alternative energy sources:

the Pigouvian and Hotelling frameworks lead to rather different conclusions when it comes to thinking about the effectiveness of a carbon tax. Pigou emphasizes the impact of a tax on substitution between commodities, in this case between energy sources. Hotelling on the other hand emphasizes the impact of a tax on an exhaustible resource on the time-path of consumption of that resource.

[in the Hotelling setting] the tax either has no effect at all on the cumulative consumption of the fossil fuel, or it drives it out of the market completely.

If we want to reduce cumulative oil consumption by for example 30%, then we need a tax of about $500 per ton of CO2: if we wanted to reduce oil consumption by two thirds we would need a tax of over $600 per ton CO2.

Electricity pricing:

The marginal social cost of power from renewable sources is close to zero, as wind, solar and hydro all have essentially zero operating costs. So we would need much lower power prices to provide the correct incentives to use clean power rather than fossil fuels.

The classic response to this conundrum has been to recommend two-part tariffs, with a fixed charge or connection or membership charge recovering the fixed costs and a usage tariff covering the variable costs.

High-Skilled Immigration and Employment at Multinationals

Britta Glennon reports in an NBER working paper that the two go together.

Skilled immigration restrictions may have secondary consequences that have been largely overlooked in the immigration debate: multinational firms faced with visa constraints have an offshoring option, namely, hiring the labor they need at their foreign affiliates. If multinationals use this option, then restrictive migration policies are unlikely to have the desired effects of increasing employment of natives, but rather have the effect of offshoring jobs. Combining visa data and comprehensive data on US multinational firm activity, I find that restrictions on H-1B immigration caused foreign affiliate employment increases at the intensive and extensive margins, particularly in Canada, India, and China.

Assar Lindbeck (1930–2020)

Colleague, co-author, visionary. Assar remains a role model. He was curious, open minded, and incorruptible. He didn’t need to prove himself or that he was correct (politically and otherwise), all he wanted was to contribute and learn. He was a generalist, both in economics and beyond. He exposed nonsense and shaped policy. He will be sadly missed.

In memory of Assar Lindbeck.

First Regulated Stablecoin Retail Transaction—at Digitec?

C. Septhon reports in Modern Consensus:

The Sygnum Digital Swiss Franc (DCHF), which is pegged on a 1:1 basis with the fiat currency, was used to complete a payment for an Apple iPad at Digitec Galaxus, Switzerland’s largest online retailer. Coinify, a digital currency platform provider, enabled the sale to take place.

Sygnum is different from Tether etc. because it is a regulated bank. Accordingly, DCHF corresponds to a monitored currency board.

“Macroeconomics II,” Bern, Fall 2020

MA course at the University of Bern.

Time: Wed 10-12. KSL course site. Course assistant: Armando Näf.

The course introduces Master students to modern macroeconomic theory. Building on the analysis of the consumption-saving tradeoff and on concepts from general equilibrium theory, the course covers workhorse general equilibrium models of modern macroeconomics, including the representative agent framework, the overlapping generations model, and possibly the Lucas tree model. Lectures follow chapters 1–4 (possibly 5) in this book.

PDF copy of what I scribbled in class.

“Unabhängigkeit der Nationalbank (Independence of the SNB),” FuW, 2020

Finanz und Wirtschaft, July 25, 2020. PDF.

The Swiss National Bank—yes, the Swiss one—feels it must remind politicians of its independence. Parliamentarians from left to right (!) voice demands. To shrink the SNB’s balance sheet? No, for more central bank profits to be distributed sooner rather than later.

I discuss misconceptions, possible motivations, and a constructive response. «The best way to defend the independence of a central bank is never to exercise it.»

“Monetäre Staatsfinanzierung mit Folgen (Monetary Financing of Government),” Die Volkswirtschaft, 2020

Die Volkswirtschaft, July 24 2020. PDF.

Clarifying the connections between outright monetary financing, QE, the distribution of seignorage profits, the relationship between fiscal and monetary policy, and central bank independence.

Abstract:

Wenn Parlamentarier höhere Gewinnausschüttungen der Nationalbank fordern, Kritiker im
Euroraum mehr «Quantitative Easing» oder Helikoptergeld verlangen und andere Stimmen
monetäre Staatsfinanzierung monieren, dann steht die Beziehung zwischen Geld- und
Fiskalpolitik zur Debatte. Eine Auslegeordnung.

“Austerity,” EJ, forthcoming

Economic Journal, forthcoming, with Harris Dellas. PDF.

We study the optimal debt and investment decisions of a sovereign with private information. The separating equilibrium is characterized by a cap on the current account. A sovereign repays debt amount due that exceeds default costs in order to signal creditworthiness and smooth consumption. Accepting funding conditional on investment/reforms relaxes borrowing constraints, even when investment does not create collateral, but it depresses current consumption. The model contains the signalling elements emphasized by creditors in the Greek austerity programs and is consistent with the reduction in the loans issued by Greece and their interest rate following the 2015 election.

Financial Innovation, Central Banks, CBDC

In its annual economic report, the BIS further warms to the idea that CBDC is a key part of central banks’ response to financial innovation.

  • Central banks play a pivotal role in maintaining the safety and integrity of the payment system. They provide the solid foundation by acting as guardians of the stability of money and payments. The pandemic and resulting strain on economic activity around the world have confirmed the importance of central banks in payments.
  • Digital innovation is radically reshaping the provision of payment services. Central banks are embracing this innovation. They promote interoperability, support competition and innovation, and operate public infrastructures – all essential for easily accessible, low-cost and high-quality payment services.
  • Central banks, as critical as ever in the digital era, can themselves innovate. In particular, central bank digital currencies (CBDCs) can foster competition among private sector intermediaries, set high standards for safety and risk management, and serve as a basis for sound innovation in payments.

See this VoxEU column on Libra’s effects.

“Macroeconomic Analysis,” VoxEU, 2020

VoxEU, June 22, 2020. HTML.

Is macroeconomics useful? Of course. To make the point, academics must regain the interpretative high ground from market commentators. While it helps when policymakers understand fundamental macroeconomic concepts, it is equally important for the general public to grasp them. More, and how this relates to the new textbook, on VoxEU.

Robert Pirsig’s “Zen and the Art of Motorcycle Maintenance: An Inquiry Into Values”

Quality, not subject or object, as the elementary fabric. ἀρετή. A rehabilitation of the sophists.

Some quotes:

If the purpose of scientific method is to select from among a multitude of hypotheses, and if the number of hypotheses grows faster than experimental method can handle, then it is clear that all hypotheses can never be tested. If all hypotheses cannot be tested, then the results of any experiment are inconclusive and the entire scientific method falls short of its goal of establishing proven knowledge. …

God, I don’t want to have any more enthusiasm for big programs full of social planning for big masses of people that leave individual Quality out. These can be left alone for a while. There’s a place for them but they’ve got to be built on a foundation of Quality within the individuals involved. We’ve had that individual quality in the past, exploited as a natural resource without knowing it, and now it’s just about depleted. Everyone’s just about out if gumption. And I think it’s about time to return the rebuilding of this American resource – individual worth. There are political reactionaries who’ve been saying something close to this for years. I’m not one of them, but to the extent they’re talking about real individual worth and not just an excuse for giving more money to the rich, they’re right. We do need a return to individual integrity, self-reliance and old-fashioned gumption. We really do. …

What is good, Phaedrus, and what is not good – need we ask anyone to tell us these things?

Anthony McWatt’s discussion of Pirsig’s philosophy in Philosophy Now:

In Zen & the Art of Motorcycle Maintenance, Pirsig first explored the history of the term ‘Quality’, or what the Ancient Greeks called arête, tracing it all the way back to Plato (428-348 BCE). He concluded that the strange position of Quality in today’s West originated with Plato’s division of the human soul into its reason and emotion aspects, in his dialogue the Phaedrus. In this dialogue, Plato gave primary place to reason over emotion. Soon afterwards Aristotle was similarily emphasizing analysis over rhetoric. And as Hugh Lawson-Tancred confirms in the Introduction to his 1991 translation of Aristotle’s Rhetoric: “There are few things that are more to be deplored in Greek culture, and notably in the legacy of Plato, than the wholly forced and unnatural division between… [the] two sister studies” of rhetoric and philosophy (p.57). Eventually this division grew into the ‘subjective versus objective’ way of thinking now largely dominant in the West. So now in the West we have objectivity, reason, logic, and dialectic on the one hand; and subjectivity, emotion, imagination, intuition, and rhetoric on the other. The former terms suggest scientific respectability, while the latter are often assumed to be artistic terms, having little place in science or rationality. It is this Platonic conception of rationality that Pirsig sought to challenge by reconciling the spiritual (for example, Zen), artistic (for example, art) and scientific (for example, motorcycle maintenance) realms within the unifying paradigm of the Metaphysics of Quality. …

Plato was perhaps a little too over-confident in how usable his theory of Forms is in practice. I wonder if it ever crossed his mind that his mentor, Socrates, might have been hinting to him and the other young philosophy students in Athens that the Good and Beauty are actually indefinable? The idea of Forms was, of course, invented by Plato, not Socrates. Unfortunately, as a consequence of Plato’s thinking that reality can be basically defined, Western philosophy is in the state that it is in today: more a handmaiden of science rather than its master. Assuming that words can capture all aspects of reality is an understandable error to make at the very beginning of the Western philosophical tradition… but having said that, it was a metaphysical error avoided by East Asian philosophy. Think about Plato’s allegory of the Cave of Ignorance and escaping from it to see the Sun of the Good, then compare it with the following quote:

“Not by its rising is there light,
Not by its sinking is there darkness
Unceasing, continuous
It cannot be defined…
The image of no-thingness…
Meet it and you do not see its face
Follow it and you do not see its back.”

Dao De Jing, Laozi, Quoted in ZMM, p.253-54

If you think about it long enough, then you’ll see that there was no ‘Cave of Ignorance’ until Plato put Western culture inside its metaphysical darkness for 2,400 years!

Obituary by Paul Vitello in the New York Times:

One of Mr. Pirsig’s central ideas is that so-called ordinary experience and so-called transcendent experience are actually one and the same — and that Westerners only imagine them as separate realms because Plato, Aristotle and other early philosophers came to believe that they were.

But Plato and Aristotle were wrong, Mr. Pirsig said. Worse, the mind-body dualism, soldered into Western consciousness by the Greeks, fomented a kind of civil war of the mind — stripping rationality of its spiritual underpinnings and spirituality of its reason, and casting each into false conflict with the other.

Obituary by Michael Carlson in The Guardian.

“Digital Money, Payments and Banks,” CEPR/IESE Report, 2020

Discussion of Antonio Fatás’ chapter in Elena Carletti, Stijn Claessens, Antonio Fatás, Xavier Vives, The Bank Business Model in the Post-Covid-19 World, CEPR/IESE report, London, June 2020. PDF.

Antonio’s chapter offers a rich overview of the dramatic changes in the world of money and banking that we have seen in recent years. I focus on two themes: the nature of money and how it relates to these developments, and the government’s response to the structural changes we observe.

I discuss the price of money, its fundamental value, store-of-value bubble, and liquidity bubble components; the opaque legal tender concept and the absurd situation that governments outlaw the use of government money (contrary to what some theories would imply); the role of trust in a world without cash; and the substitution of money by smart contracts tied to a database.

And I comment on the many facets of digitalization; the time lag between the origination of new business models and regulatory catch-up; and on central bank digital currency as a key element of structural change in the financial system.

Covid-19 Superspreading Events Database

By Koen Swinkels, on Medium, a database and preliminary interpretation subject to various caveats. The preliminary suggested interpretation is as follows:

  • Nearly all SSEs in the database — more than 97% — took place indoors
  • The great majority of SSEs happened during flu season in that location
  • The vast majority took place in settings where people were essentially confined together, indoors, for a prolonged period (for example, nursing homes, prisons, cruise ships, worker housing)
  • Processing plants where temperatures are kept very low (especially meat processing plants) seem particularly vulnerable to SSEs