Echo der Zeit, SRF, 12 October 2026. HTML with link to audio file.
Bob Hall’s and Mike Woodford’s contribution to the micro foundations of macroeconomics.
Echo der Zeit, SRF, 12 October 2026. HTML with link to audio file.
Bob Hall’s and Mike Woodford’s contribution to the micro foundations of macroeconomics.
My interview with Claudia Gnehm, published in Tamedia outlets, together with the accompanying article in Finanz und Wirtschaft, generated many responses from readers. Here are the comments that received the most support from other readers:
Most-liked comments on interview:
#1 Dirk Niepelt betont in diesem wohltuend klaren Artikel, dass das Verursacherprinzip als Richtschnur auch und gerade für Banken und für die UBS gilt.
Es kann nicht sein, dass sich eine systemrelevante Bank sehr spekulativen Geschäften hingibt, die naturgemäss einen weit höheren Ertrag geben können, und dass der Steuerzahler und der Staat im Notfall für die Verluste einstehen muss.
Es darf nicht sein, dass die Gewinne privatisiert, dass das Management ohne substanzielle Verantwortung agiert und der Staat sich in die Geiselhaft einer so riesigen Bank begibt, so dass auch die Schweiz in enorme Schwierigkeiten geraten könnte.
“Sollte sich die UBS nur deshalb für eine Abwanderung entscheiden, weil sie in der Schweiz die Konsequenzen der von ihr eingegangenen Risiken tragen muss, wäre dies kein Argument gegen eine strengere Regulierung”.
Es ist zu hoffen, dass der Bundesrat weiterhin in der Sache hart bleibt, die Eigenkapitaldecke einfordert- und nicht einknickt.
#2 Meines Erachtens ein guter und sachlicher Artikel. Es müssten aber auch das Top-Management (die obersten 1000) sowie der Verwaltungsrat stärker im die Pflicht und persönliche Haftung genommen werden. Das senkt den Risikoappetit zusätzlich.
#3 Gutes und sachliches Interview. Die UBS braucht mehr hartes Eigenkapital. Da führt kein Weg darum herum. Und es zeigt, dass der US Kapitalmarkt mit seinen laschen Regeln wieder einmal ausser Kontrolle läuft. Nützt uns leider nichts, da wir im Gegenteil noch damit erpresst werden.
#4 Für mich sind die Argumente des Finanzprofessors nachvollziehbar. Nüchtern und klar.
#5 Die Aussagen von Ermotti und UBS, dass mehr Eigenkapital sie weniger wettbewerbsfähig macht sind schlicht Blödsinn (der Professor drückt das diplomatischer aus). Eigenkapital ist für die Bank ein Kapitalpuffer, der immer auf der Seite liegen muss, damit Verluste ausgeglichen werden können. Eine Art “Notgroschen”.
Die Argumentation der Bank ist, dass sie mit dem Geld in diesem Puffer nicht wirtschaften kann und deswegen weniger wettbewerbsfähig ist. Um das als Blödsinn zu entlarven, muss man nur schauen, welches Geld die UBS sonst so ausgibt oder “weglegt” ohne damit zu wirtschaften. Genau: Dividenden. Hier werden Milliarden deponiert, mit denen die Bank nicht wirtschaften kann. Um das Eigenkapital aufzubauen, müsste die Bank lediglich einige Jahre keine Dividenden auszahlen und das hätte keinen Einfluss auf das Geschäft der Bank, denn Dividenden entziehen dem Unternehmen Kapital und damit wird nichts gemacht.
Es geht der UBS faktisch nur darum, den Aktionären weiter Geld auszahlen zu können, welches zu einem nicht unwesentlichen Anteil mit der Staatsgarantie erwirtschaftet wird. Auf Deutsch: Gewinne privatisieren, Verluste sozialisieren.
Das AT1 Argument zieht nicht, wie der Fall der CS eindrücklich bewiesen hat. Das wird die Die Inkompetenz der Schweizer Politik in diesem Zusammenhang wird die Schweiz leider noch teuer zu stehen kommen.
#6 Endlich, Wirtschaftspolitik wird so unglaublich vernachlässigt. Hier für einmal verständlich und gut.
#7 Selten, wenn überhaupt, habe ich in dieser Zeitung einen so verständlichen, so informativen und so sachlichen Text zum Thema Bankenregulierung gelesen wie dieses Interview mit Dirk Niepelt. Es macht deutlich: Wer sich als Parlamentarier*in gegen klare und strenge Regeln für die Grossbank UBS wehrt, outet sich unzweideutig als Bankenvertreter*in. Er / sie ist zwar vom Volk gewählt, aber ein/e Volksvertreter*in ist er / sie nicht.
#8 Schauen Sie sich mal am Paradeplatz um, es gibt noch andere Banken. Das beste, was wir (jeder einzelne von uns) tun können, ist, dass wir selber unser Vermögen… nicht alle bei nur einer Riesen Bank haben.
#9 Dirk Niepelt trifft den wunden Punkt der UBS-Debatte. Es geht weniger um Basel-Quoten, AT1-Anleihen und Bilanztechnik als um die elementare Ordnung einer Marktwirtschaft. Wer Gewinne vereinnahmt, muss Verluste tragen. Freiheit und Haftung sind unteilbar.
Bei einer systemrelevanten Bank von der Grösse der UBS ist die Annahme, der Staat werde sie im Ernstfall fallen lassen, kaum glaubwürdig. Diese Erwartung wirkt wie eine unsichtbare Subvention (implizite Staatsgarantie). Sie verbilligt die Finanzierung, begünstigt die Eigentümer und verlagert das äusserste Risiko auf die Allgemeinheit. Steuern und Arbeitsplätze begründen keinen Anspruch auf Rettung, weder beim Dorfbäcker noch bei der Grossbank.
Gerade deshalb ist die Abwanderungsdrohung aufschlussreich. Sollte die Schweiz als Standort nur attraktiv sein, solange sie einen Teil der Risiken stillschweigend mitträgt, widerlegt dies strengere Regeln nicht, sondern begründet sie. Die Politik schuldet der UBS keine Standortgarantie, dem Land aber eine glaubwürdige Haftungsordnung!
Mehr Eigenkapital ist keine Strafe für Erfolg, sondern der Preis unternehmerischer Freiheit bei systemischer Grösse. Die UBS darf global handeln und verdienen. Sie muss jedoch auch die Kosten und Verluste dieses Geschäfts tragen können, ohne die Schweiz im Krisenfall (wieder) in Geiselhaft zu nehmen.
#10 O-Ton DN: “Aus volkswirtschaftlicher Sicht schaffen Unternehmen nur dann Mehrwert, wenn sie Gewinne erzielen können, ohne Kosten auf die Allgemeinheit abzuwälzen.”
Gibt es da nicht noch sehr viel mehr zu tun, als nur an der Spitze des Eisbergs? Mir kommen Firmen in den Sinn, die ihren Müll der Allgemeinheit aufbürden und solche, die sich um die von ihnen verursachten Umweltschäden total foutieren.
Most-liked comments on article:
#1 Diesem Beitrag muss nichts angefügt werden. Dieser sollte Pflichtlektüre für die von uns gewählten Ständeräte sein. Sie beugen sich als Erstrat über die Thematik der zukünftigen Eigenkapitalvorschriften für UBS & Co. Wenn sie ihren Job verantwortungsvoll und nicht in vorauseilender Anbiederung an Ermotti & Co machen, dann bleibt eigentlich nur, dass massgebliche höhere Eigenkapitalvorschriften der zukünftigen Subventionierung der UBS (über implizite Staatsgarantie, ohne Abgeltung dieser „Versicherungsleistung“ durch die UBS, über Liquidity Backstop, ohne Abgeltung dieser „Versicherungsleistung“, etc.) einen Riegel vorschieben.
Klar, dass Ermotti & Co lamentieren und sich bitterlich beklagen, ungerecht behandelt zu werden, weil sie ja exorbitante gesamtwirtschaftliche Leistungen für die Schweiz erbringen und dafür auch noch „bestraft“ (=höhere Eigenkapitalvorschriften) werden. Klar aber auch, dass Ermotti & Co mit dieser Argumentation Unwahrheiten verbreiten, weil sie schlicht einäugig unterwegs sind und die vorhandene Subventionierung durch Staat und Steuerzahler nicht gelten lassen wollen.
Es ist zu hoffen, dass der SR seinen Job macht und erst einmal die Interessen von Staat und Steuerzahler vertritt und nicht primär der UBS gefallen will.
#2 Ein “schöner” Artikel aber am Ende ist es immer wieder der Mensch, der die Fehler verursacht (oder seiner unendlichen Gier den freien Lauf gewährt)! Eine gesunde EK Basis ist gut, die Kontrolle des Managements ist besser! Solidarische Haftbarkeit (generiertes Einkommen!) des Managements samt VR (alle mit einem Einkommen CHF 1 Mio.+) und dies rückwirkend auf die letzten 5 Jahre sowie 2 Jahre nach Beendigung des Arbeitsverhältnis, ist wirksamer als jede EK Regel samt Überwachung von der FINMA.
#3 Jeder Parlamentarier, der die Risiken des internationalen Bankgeschäftes nicht ganz klar benennen und erklären kann, sollte besser diesen Artikel verstehen und auf die Empfehlungen der Nationalbank hören als auf Ermottis Sirenenklänge.
Finanz und Wirtschaft online. 10 August 2026. PDF of online article. Also published in print on 12 August 2026.

“Ob Bäcker oder Grossbank – wer Gewinne erzielt, muss im Krisenfall auch Verluste tragen,” (Whether Bakery or Global Bank: Those Who Earn the Profits Must Also Bear the Losses). Interview published in Tagesanzeiger online, Der Bund online, Berner Zeitung online, Basler Zeitung online, and elsewhere. 7 August 2026. PDF of hardcopy.
After leaving office, many central bank governors and senior central bank policymakers tend to become more vocal in questioning the dominant role of commercial bank money in providing liquidity to households and firms. Consider, for example, Mervyn King’s 2016 book The End of Alchemy or Andy Haldane’s June 2021 speech. Stefan Ingves, until recently Governor of the Riksbank, provides another example. SUERF Policy Brief 1507 summarizes his remarks at a recent SUERF event as follows:
His framing was emphatically political, not just economic: how much oligopoly power should banks have, and should the central bank’s role change merely because technology does? His own view: money is part of how a nation defines itself; the process should speed up; CBDCs will not threaten banks; and without a CBDC we are effectively living with privatized money — “wait until people find out.”
The same policy brief also summarizes remarks by Ulrich Bindseil, another prominent former central banker:
On CBDC remuneration he described an “unholy alliance” of opponents — financial-repression sceptics fearing negative rates, banks fearing competitive positive rates, and central banks willing to compromise to get a CBDC at all. On stablecoins he noted that prohibitions (MiCAR, the Genius Act) are leaky, with roughly $86bn of $290bn already remunerated via lending protocols. His conclusion: in a fully digital, 24/7 world, forcing money’s liquidity premium to swing with short-term rates has no economic rationale and breeds instability; a quantity-constrained CBDC would be a “reversal of values” placing public money under restrictions that private money escapes.
In his Financial Times Free Lunch column, Martin Sandbu discusses our recent Barcelona report (with Stephen Cecchetti, Hélène Rey, and Xavier Vives).
He writes: “The introduction is as good a guide to the main policy issues as I have seen. In particular, it helpfully directs our focus not so much to the technical possibilities digitisation brings as to what they mean for who is empowered and enriched by the systemic changes that can follow…”
Martin continues: “It gives a nuanced discussion of how a retail central bank digital currency (CBDC) can be designed to improve longstanding problems with the current system. And it does a good job of surveying both the risks and the opportunities of ‘tokenisation’ — the representation of claims by digital ‘tokens’ that can circulate through computer networks in decentralised ways — which the authors rightly point out is the key technological development.”
Martin is more critical of the report’s assessment of the relative prospects of tokenized deposits and stablecoins. He interprets this assessment as reflecting a “preference for preserving the two-tier system,” which he does not fully share (nor do we). Lucrezia Reichlin, our distinguished discussant at the online report launch, took a similar position, emphasizing how current euro area plans reflect efforts to protect banks’ business models.
The report is available here. A recording of the online presentation is available here.
CEPR eBook, with Stephen Cecchetti, Hélène Rey, Xavier Vives. 2 June 2026. PDF, HTML.
Column: New Coins on the Block: Digital Currencies and the Financial System (with Stephen Cecchetti, Hélène Rey, and Xavier Vives). VoxEU, June 2, 2026. HTML.
The crypto system is no longer a sideshow. Dollar stablecoins now put dollar claims into circulation well beyond the regulated US banking perimeter, and cryptoisation is beginning to transform the international monetary and financial system. This column argues that the changes crypto sets in motion will be shaped by institutions and technological innovation. Who issues money, who anchors it, and who bears the cost when things go wrong are central issues. But as money migrates onto programmable, cross-border rails, the resilience of the rail itself becomes part of what determines which monies are trusted. Digital money will be reliable only where sound institutions and robust technology come together.
CEPR webinar, April 2026. Youtube.
With a legislative vote on the digital euro approaching, the debate around its design and implications is entering a critical phase. This webinar will take stock of where the current proposal stands, unpacking key features, open questions, and points of contention. Join us to better understand what is at stake as Europe moves closer to a potential digital currency rollout.
Join our panel of speakers – Isabelle Mateos y Lago (BNP Paribas), Lucrezia Reichlin (London Business School & CEPR), Jean-Pierre Landau (Sciences Po and CEPR), Harald Uhlig (University of Chicago & CEPR) and Éric Monnet (EHESS, PSE & CEPR) – along with moderator Dirk Niepelt (University of Bern & CEPR), for a discussion on this timely topic.
Central Banking, March 25, 2026. HTML. Interview text:
1. A number of central banks are currently working on introducing retail CBDC. In your view, what are the risks they most frequently overlook?
One risk is losing sight of the bigger picture. Retail CBDC is not merely a technological innovation that may or may not help respond efficiently to structural change in the payment system. It can also serve as a tool for broader reform of the monetary architecture. The overarching objective should be to provide liquidity to Main Street at minimum social cost, and the debate about retail CBDC should focus on whether it can help achieve that goal. Instead, the discussion often centers on secondary objectives and insufficiently questions the status quo.
2. The ECB, for example, argues that holding limits will ensure that commercial banks do not feel too much pain from the digital euro as deposit flight will be small. What is your view?
Why would commercial banks’ “pain” be a primary concern for policymakers? Even if it were, the fears around deposit flight are often overstated. Retail CBDC does not remove funds from financial markets—it reallocates them from banks to the central bank, which reinvests the funds. Depending on policy design, retail CBDC may have little or no effect on banks’ funding conditions, and even when it does, this is not necessarily harmful. If policymakers are genuinely concerned about deposit flight, the appropriate tool is remuneration, which directly influences demand. In contrast, holding limits are a blunt instrument: they fragment markets, create incentives to circumvent the restrictions, and can encourage runs into other assets.
3. How should commercial banks prepare for CBDC issuance?
Commercial banks should first consider what societal benefits their money creation provides. If these societal benefits exist and are significant, there is little reason for concern. If, however, bank money creation primarily serves banks or their clients without generating substantial social value, banks should prepare for reduced deposit funding. Even in that case, losing access to deposits or inexpensive substitutes would not spell the end of banking—banks generate value in many other ways.
4. Most central banks are pursuing non-remunerated CBDCs. Is this the right course of action?
No. A retail CBDC that does not pay interest is less attractive as a store of value, making bank deposits relatively more appealing and increasing the payment system’s dependence on fragile, too-big-to-fail banks. It is difficult to justify introducing retail CBDC without allowing it to compete with bank deposits—unless the goal is simply to preserve banks’ money-creation business model, which is not obviously a societal objective. Non-remuneration also reduces retail CBDC’s usefulness as payment instrument, potentially undermining any other objectives that the CBDC is intended to achieve.
5. What is the interplay between the policy choices of holding limits and remuneration?
Remuneration and holding limits influence retail CBDC in fundamentally different ways. Remuneration is a price instrument: by adjusting the interest rate on CBDC, the central bank can influence how much households and firms choose to hold. Holding limits, by contrast, are quantity restrictions applied to individual users. When demand varies across households and firms, these limits create distortions and incentives for circumvention.
6. The post-GFC environment saw plenty of public anger directed at the banking sector, which was seen to have managed to get away “scot-free” thanks to generous QE policies from central banks, with plenty of arguments connecting banking sector bailouts and the “populism”, for lack of a better term, of the 2010s. How would issuing digital public money play into this?
Indeed, there is a view that banks, their staff, or their customers privatize gains while socializing losses. If true, this would amount to large implicit subsidies and distortions. Banks have also been seen to preserve this asymmetry, lobbying policymakers and playing a game of whack-a-mole with regulators. Retail CBDC could offer a new avenue to address this situation. On one hand, it increases transparency in the monetary architecture, fostering accountability and raising public awareness. On the other hand, it acts as a “carrot”—an attractive alternative payment instrument that can draw users away from deposit holdings at fragile banks—replacing the “stick” of regulation, which often lags and carries collateral costs. The success of this strategy depends on making retail CBDC a genuinely appealing substitute for deposits, unlike policies that rely on stringent holding limits and non-remuneration.
7. If central banks found themselves more “politicised” by issuing a CBDC, what policy choices could they make to avoid this perception?
The main risks associated with retail CBDC may indeed lie in the realm of political economy. Its successful introduction would expand the central bank’s balance sheet, likely triggering demands and proposals from policymakers outside the central bank as well as from interest groups. This makes institutional design crucial. The decision to introduce retail CBDC should not rest with the central bank, since the implications extend well beyond monetary and financial stability. At the same time, central banks must retain full operational control over the instruments necessary to fulfill their mandate, particularly price stability. Clear governance arrangements and a well-defined mandate are essential to ensure that retail CBDC does not blur the boundary between monetary policy and fiscal or industrial policy objectives.
8. What are the main academic debates surrounding CBDC? How should central banks think about them?
The literature has addressed “micro” and “macro” dimensions of retail CBDC. The former concern, for example, privacy and its implications for CBDC demand. Macro issues typically relate to banks, financial intermediation, credit, and investment. I find it useful to organize the findings in this macro literature around the core features that make CBDC relevant in the first place. Yet these features have not been emphasized strongly. Rather than focusing on the fundamental sources of CBDC’s macroeconomic relevance, the literature often shows how accompanying policy choices shape its economy-wide implications. These accompanying choices—for example, regarding CBDC remuneration, the regulatory treatment of bank deposits relative to central bank credit facilities, or the design of central bank operating frameworks—are frequently treated as secondary when they are, in fact, decisive. Even slight changes in model assumptions can make results that suggest CBDC is transformative collapse toward neutrality. A key lesson of the literature, therefore, is that accompanying policy choices are of first-order importance for retail CBDC. This underscores that political economy considerations are equally central.
CEPR eBook, 12 November 2025. PDF, HTML.
VoxEU column: Frontiers of Digital Finance: A Global Perspective. HTML.
VoxEU column: Frontiers of Digital Finance: Stablecoins, monetary ‘singleness’, tokenisation, and decentralised finance. HTML.
My introduction to/summary of the book:
The digitisation of payment, trading, and settlement systems is reshaping the financial architecture. New technologies are transforming how value is created, stored, transferred, and accounted for, altering the balance between public and private money, enabling the bundling of services, challenging traditional financial institutions, and prompting a wave of regulatory and institutional responses.
The global picture is uneven. Some regions are leapfrogging others, and conflicting ideologies about the proper role of the state in money give rise to fragmentation and concerns about monetary sovereignty.
This book offers an overview of major trends, as analysed by leading researchers and policymakers. It is structured in four parts. Part 1 presents regional perspectives, examining the approaches taken by India, Brazil, sub-Saharan Africa, the United States, and the euro area. For the euro area, the focus is on the digital euro and its implications for monetary sovereignty, privacy, and holding limits aimed at preserving financial stability.
Part 2 delves into stablecoins – the shooting stars in the digital financial ecosystem. Their evolution has spurred a flurry of policy debate, with the European Union’s Markets in Crypto-Assets Regulation (MiCAR) and the US GENIUS Act now offering greater regulatory clarity.
Part 3 turns to the concept of monetary ‘singleness’ – the principle that all forms of money in a currency area should be fully interchangeable and trade at par. As new digital forms of money proliferate, the cohesion of the monetary system may be called into question.
Part 4 brings together chapters on tokenisation, digital platforms, and decentralised finance (DeFi), and their broader impact on service bundling, credit allocation, financial inclusion, and consumer protection.
Regional perspectives
In the opening chapter of Part 1, Amiyatosh Purnanandam describes how India’s Unified Payments Interface (UPI), launched in 2016, has improved the efficiency of account-based payment systems by addressing the core frictions of information exchange, authentication, and final settlement. Developed under a public-private partnership, UPI enables real-time, low-cost, and interoperable digital payments between any two entities, regardless of their bank or payment service provider. India overcame challenges around identity verification and financial inclusion by implementing a nationwide system of digital, biometric-based identification and by expanding access to bank accounts for large segments of the unbanked population. These developments, alongside digital infrastructure investments and regulatory support for private sector participation, allowed UPI to lower transaction costs and provide small businesses with digital transaction histories that improved access to credit.
Purnanandam highlights how demonetisation and the COVID-19 pandemic accelerated the adoption of UPI. The system’s interoperable design allows users to choose among competing apps, reinforcing network effects and encouraging innovation. Early adoption by banks in some areas led to persistent increases in digital payment usage. Moreover, UPI has enabled streamlined welfare disbursements, with nearly 60% of subsidy payments being delivered directly into beneficiary accounts by 2024. According to Purnanandam, the UPI experience demonstrates the critical role of coordinated efforts across public and private sectors, along with a flexible and inclusive regulatory framework.
Fabio Araujo and Arnildo da Silva Correa describe the Central Bank of Brazil’s comprehensive innovation strategy, Agenda BC#, fostering tokenisation and integration to enable faster, more transparent, and programmable asset transfers. The agenda is built around four interlinked pillars: (1) Pix, an instant payment system launched in 2020, which also supports a ‘synthetic’ retail central bank digital currency (CBDC) model; (2) Open Finance, which promotes secure data sharing and competition; (3) Drex, Brazil’s central bank digital currency designed as a platform for a tokenised economy; and (4) the internationalisation of the Brazilian real, through regulatory modernisation and cross-border interoperability. Each component reinforces the others, creating a cohesive, digital financial ecosystem that enhances efficiency, security, innovation, and inclusivity.
Pix marked the foundational shift, offering a public infrastructure for instant, programmable payments that has been widely adopted across Brazil and credited with improving financial inclusion and spurring innovation. Open Finance expanded the ecosystem by allowing consumers to share financial data among institutions, unlocking more tailored services and competitive offerings. Drex builds on this by introducing distributed ledger technology, enabling advanced programmability, atomicity, and secure, tokenised deposits while incorporating privacy safeguards such as zero-knowledge proofs. Finally, internationalisation efforts are aligning domestic systems with global standards. Together, these initiatives aim to create a user-centric financial system where services are accessed through intelligent aggregators, enhanced by AI and driven by user-controlled data.
Luca Ricci and co-authors describe how digital innovations are reshaping the payment landscape across sub-Saharan Africa, facilitating financial inclusion, payment efficiency, lower remittance costs, and reduced informality. Private mobile money has been particularly impactful, with account ownership far outstripping the growth of traditional bank accounts. While central bank digital currencies, fast payment systems, and crypto assets are debated (with Nigeria having already launched the eNaira), their broader adoption is held back by weak digital infrastructure, limited institutional capacity, low levels of financial and digital literacy, and the high costs of system deployment. Cross-border payments remain slow and costly, and fragile governance frameworks heighten concerns about consumer protection, data privacy, and financial integrity.
To address these challenges, the authors outline four policy priorities: (1) investment in infrastructure and skills; (2) supporting private innovation within secure and competitive regulatory frameworks that enable interoperability and reinforce governance; (3) positioning public digital tools to complement – rather than compete with – private solutions, based on assessments of market gaps and resource needs; and (4) fostering regional and international coordination to ensure interoperability and resilience. Ultimately, digital payment reforms must be anchored in sound macroeconomic policies that preserve monetary sovereignty and financial stability.
Michael Lee argues that the 2025 Executive Order on digital financial technology and the GENIUS Act represent a strategic shift in the United States towards private sector-driven innovation in blockchain-based financial systems. The Executive Order rules out the development of a CBDC while endorsing a technology-neutral approach and regulatory clarity for stablecoins. The GENIUS Act establishes a federal framework for fiat-backed payment stablecoins, mandating at-par redemption, backing primarily by US dollar cash and cash equivalents, and regulatory oversight. Regarding the more than 340 stablecoins in circulation – 97% dollar-denominated and dominated by Tether and Circle – concerns remain over reserve transparency, and redemption practices vary widely.
Beyond stablecoins, Lee describes the increasing tokenisation of Treasury funds and commercial bank deposits. Tokenised US Treasury funds are largely held by long-term investors or used as on-chain reserves. Deposit tokens and tokenised deposits typically align with existing regulatory standards – including full know-your-customer (KYC)/anti-money laundering (AML) compliance and access via whitelisting – and can pay interest. In contrast, stablecoins circulate more freely (issuers functionally manage a whitelist only at the issuance stage) but are barred from offering interest directly under the GENIUS Act; however, issuers often partner with platforms to indirectly deliver yield. Together, these instruments form a spectrum, each balancing accessibility and return in different ways.
Ulrich Bindseil and Piero Cipollone argue that central bank electronic cash (CBEC) is essential to preserving monetary sovereignty, as private (often foreign) service providers increasingly dominate retail payments. This carries significant risks: rising payment costs due to oligopolistic market power, reduced financial and monetary stability, loss of seignorage income, and increased vulnerability to geopolitical risks. Bindseil and Cipollone present CBEC not as a disruption but as a necessary evolution to ensure the continued public provision of a neutral, secure, and sovereign monetary instrument that is designed to complement rather than replace commercial bank money.
The authors emphasise that monetary sovereignty faces new threats from globalisation, the advent of new technologies such as public blockchains, and a surge of nationalism that dismisses the merits of international co-operation. CBEC helps counter these threats across five dimensions: it protects macro-financial stability by preventing dollarisation; it ensures access to payment systems without abuse of market power; it preserves seigniorage income and the financial independence of central banks; it reduces strategic dependencies on foreign actors; and it protects informational sovereignty by avoiding overreliance on foreign-owned platforms.
Maarten van Oordt argues that the accelerating shift away from cash in the euro area is driving a significant erosion of privacy in payments. Unlike cash, electronic payments generate detailed records that are monitored by payment service providers and subjected to regulatory oversight. These data are not only used for compliance but also for commercial purposes, and they can be leveraged not just to monitor but also to censor or exclude individuals. The author emphasises that common justifications for payment surveillance – such as crime prevention and tax enforcement – do not automatically warrant broad monitoring powers in a democratic society.
Van Oordt does not expect the currently proposed digital euro design, which includes both online and offline payment options, to close the growing ‘privacy gap’ in retail payments. Online digital euro payments would be processed centrally, offering little improvement over existing systems, and, depending on the robustness of pseudonymisation techniques, could even exacerbate privacy risks. Offline payments, while potentially more private, face challenges such as usage limits and unresolved security concerns. Without critical amendments – such as enabling remote payments through offline balances or designing online payments to emulate the anonymity of cash – the author foresees the digital euro as heightening surveillance risks. He stresses that privacy in payments is a public good and warns that failing to safeguard it in the digital age would squander a crucial opportunity to redesign the financial system in such a way that upholds individual autonomy and democratic values.
Katrin Assenmacher and Oscar Soons explain that the European Commission’s June 2023 legislative proposal tasks the European Central Bank (ECB) with developing instruments to limit the use of the digital euro as a store of value, including the introduction of individual holding limits. These limits are intended to balance three objectives: enabling convenient payments; ensuring smooth monetary policy transmission; and safeguarding financial stability. The authors describe the ECB’s methodology for calibrating these limits so they are high enough for payment use but low enough to prevent significant bank deposit outflows that could destabilise funding structures.
To assess the appropriate holding limits, the ECB considers both a business-as-usual scenario – where the digital euro is mainly used for payments – and a flight-to-safety scenario, which involves mass withdrawals from banks during crises. Surveys and econometric analyses yield a broad range of estimates for digital euro demand. However, even under conservative assumptions, research indicates that large deposit outflows would likely only arise if individual holding limits exceeded €5,000, at which point banks would need to rely more heavily on central bank or market-based funding to manage liquidity pressures.
Stablecoins
In the first chapter of Part 2, Hugo van Buggenum, Hans Gersbach, and Sebastian Zelzner discuss how stablecoins – digital assets pegged to fiat currencies – have rapidly evolved from niche instruments into a major segment of digital finance. While fiat-backed stablecoins promise to combine the technological advantages of crypto with the stability of traditional money, depegging episodes underscore their vulnerability to run risks due to illiquid reserves, limited issuer commitment, and noisy market signals. Trading on active secondary markets can mitigate run incentives by giving holders alternative exit options when redemptions are restricted.
The authors discuss how the EU MiCA Regulation and the US GENIUS Act address systemic risks posed by stablecoins, focusing on reserve quality, redemption rights, and transparency. They suggest that well-designed redemption restrictions – such as gates or fees – should be permitted to prevent destabilising runs. They also caution against the remuneration of stablecoins, as interest payments could trigger destabilising competitive dynamics and coordination failures across issuers, and examine potential effects on banks, monetary policy transmission, and overall financial stability.
Rodney Garratt highlights the dramatic growth of the US dollar-denominated stablecoin market and the fundamental regulatory shift that now encourages institutional participation, including by commercial banks. The author expects the entry of traditional financial institutions to reshape the competitive landscape, with banks serving their regulated clients via public blockchain-based payment rails, while existing issuers continue to operate within the crypto ecosystem.
Garratt likens stablecoins to digital travellers’ cheques – clearing instruments redeemable at par but not tied to individual account holders. As banks enter the space, redemption frictions and interoperability challenges echo historical issues from the pre-clearinghouse era of cheque processing. He argues that a universal stablecoin clearing system will be crucial for broader adoption, ensuring fungibility and monetary singleness across issuers. While stablecoins may not offer clear advantages in many domestic use cases – given the rise of real-time payment systems – he sees potential in global, programmable transactions, particularly for corporate users needing low-cost, high-speed, cross-border payments. Garratt predicts bank-issued stablecoins will have short lifecycles, acting as temporary payment instruments rather than long-term stores of value.
Steve Cecchetti and Kermit Schoenholtz compare stablecoins and tokenised deposits within the context of the new US regulatory framework. They note that although the GENIUS Act prohibits interest payments to holders, limits eligible reserve assets, and enforces compliance with KYC, AML, and anti-terrorist financing (ATF) standards, it still contains significant regulatory gaps. Platforms can circumvent the interest ban by offering yield-like ‘rewards’; reserve requirements permit exposure to run-prone assets like prime money market funds and uninsured bank deposits; and enforcing illicit-use restrictions is particularly challenging for users of noncustodial wallets. Most notably, the absence of capital requirements raises doubts about the ability of stablecoins to serve as safe, information-insensitive assets under stress.
According to the authors, tokenised bank deposits offer a more stable and robust alternative, combining the legal protections of traditional bank deposits with features such as programmable settlement, real-time clearing, and blockchain interoperability. Because they are issued by regulated, FDIC-insured banks with central bank access, tokenised deposits are shielded from many of the structural vulnerabilities that afflict stablecoins. Moreover, they offer stronger privacy protections, reduce cross-border redemption risks, and more easily support multiple currencies – mitigating concerns around dollar dominance.
David Andolfatto explores the role of Tether (USDT) in the evolving landscape of private digital money, highlighting both its utility and its vulnerabilities. Pegged to the US dollar while operating outside the traditional banking system, Tether fills critical roles in blockchain-based asset trading, cross-border payments, and as a dollar substitute in emerging markets. While verified institutional users are entitled to par redemption, retail users depend on secondary market liquidity. This two-tier structure and the absence of regulatory oversight raise financial stability concerns.
Despite claims of full reserve backing, primarily in short-term US Treasuries, Tether’s transparency is limited to attestations, and it is legally structured to avoid US regulation. But Andolfatto argues that Tether’s reliance on Cantor Fitzgerald, a US-regulated primary dealer, presents a policy window for oversight and systemic risk mitigation. In particular, US policymakers could require Cantor to act as a fiduciary, using its Federal Reserve master account to tighten reserve management, and applying existing AML/KYC standards.
Richard Portes argues that the multi-issuer stablecoin model (MISC), where a stablecoin is issued jointly by EU-regulated institutions and third-country entities, presents serious financial stability risks and regulatory challenges. This arrangement, not explicitly foreseen under the MiCA regulation, creates loopholes for regulatory arbitrage, fragmented reserve management, and accountability confusion, particularly during redemption runs or crises. The fungibility of tokens across jurisdictions allows issuers and holders to treat them as interchangeable, even though only part of the system is subject to EU rules, reserves may be ringfenced abroad during stress, and redemptions could be unequally honoured.
Portes sees several policy options, including banning MISCs outright, amending MiCA to explicitly regulate cross-jurisdiction co-issuance, or developing global regulatory standards. He notes that some EU policymakers have voiced strong opposition to MISCs, and warns that regardless of the legislative path chosen, urgent supervisory and legal adaptations are needed to preserve financial stability, close regulatory gaps, and uphold MiCA’s credibility in a globalised crypto-financial system.
Harald Uhlig compares European plans for a CBDC and the US strategy to promote privately issued stablecoins. While the ECB sees CBDC as a way to modernise cash, preserve monetary sovereignty, and reduce dependence on foreign payment providers, the US approach possibly reflects stronger trust in markets and concerns about government overreach and privacy. Despite these different strategies, the author notes a fundamental convergence: both digital currencies must avoid paying interest and may ultimately rely on central bank backing to ensure safety and stability.
Uhlig is critical of the US regulatory framework that prevents stablecoins from becoming robust and competitive – particularly the denial of Federal Reserve master accounts and interest payments, which would allow them to operate like fully reserved narrow banks. He warns that this creates stablecoins that are ‘fragile by design’, as illustrated by recent depegging events. He also highlights the inconsistency of paying interest on bank reserves but not on digital cash held by the public, viewing it as a concession to the traditional banking sector. While stablecoins may offer innovative features like smart contracts and programmable payments, their growth could generate international tensions. Ultimately, Uhlig sees stablecoins and CBDCs as part of ongoing creative destruction in finance – technological progress that doesn’t eliminate but instead relocates deeper structural tensions like liquidity risk and maturity mismatches.
Monetary singleness
In the first chapter of Part 3, Rhys Bidder explores the principle of singleness of money – the idea that all forms of money within a currency area, including bank deposits and digital tokens, should trade at par with the central bank’s unit of account. In the traditional two-tier banking system, singleness is maintained through central bank infrastructure and liquidity support, ensuring trust and stability. In contrast, stablecoins and DeFi instruments operate outside these systems, making minor deviations from par common.
Bidder argues that these small fluctuations are not inherently problematic and may fade as technology, transparency, and market infrastructure improve. The real concern lies in large depegs during periods of stress, such as during the 2023 US banking crisis, which exposed the fragility of stablecoins under liquidity pressure. To address this, he proposes that stablecoins backed by high-quality assets be granted conditional access to emergency liquidity facilities. Rather than fixating on minor price noise, the policy debate should focus on preventing systemic instability during times of stress.
Jonathan Chiu and Cyril Monnet similarly examine the concept of monetary singleness. Their starting point is the common concern among central banks that programmable digital currencies – whose use can be restricted through embedded rules – could undermine singleness by creating distinctions among tokens of equal face value. This concern has led central banks to dismiss digital currencies incorporating programmability. In contrast, the authors argue that programmability can enhance economic efficiency and that the loss of singleness may be an acceptable – or even desirable – feature in certain contexts.
Chiu and Monnet observe that, under perfect information, token prices would adjust to reflect differences in restrictions, enabling efficient allocations despite the loss of singleness. In such cases, prohibiting programmability would reduce welfare. However, under imperfect information, adverse selection may arise, with unrestricted tokens effectively subsidising restricted ones. As these distortions grow, the welfare gains from programmability diminish. The authors challenge the conventional view – often informed by the US free banking era – that non-uniform money necessarily leads to inefficiency. Instead, they advocate for a nuanced regulatory approach, such as Pigouvian taxes on excessive programmability or incentives to enhance token transparency.
Tokenisation, platforms, credit, and decentralised finance
In the first chapter of Part 4, Jon Frost, Leonardo Gambacorta, Anneke Kosse, and Peter Wierts argue that tokenisation – the digital representation of assets on programmable platforms – has the potential to improve the efficiency and functionality of the financial system. The tokenisation of money, including central bank money and commercial bank deposits, could be a first step, while stablecoins fall short in the authors’ eyes on stability, liquidity, and regulatory compliance. They suggest building on the existing two-tier monetary system and integrating tokenisation with central bank money to ensure trust and safety.
The authors also see potential for tokenisation to enhance capital markets – particularly in bond issuance – by reducing costs and improving liquidity. However, they also point to risks stemming from legal uncertainty, operational vulnerabilities, and the concentration of multiple functions on single platforms. Governance challenges and poor interoperability with legacy systems further complicate adoption. In the authors’ view, both public and private sectors have roles to play in managing these risks and enabling tokenisation to contribute meaningfully to financial safety and efficiency.
Emre Ozdenoren and Kathy Yuan explore how tokenised money – digital currencies issued or guaranteed by central banks or private platforms – can transform financial systems by automating transactions, reducing information frictions, and enhancing liquidity. Unlike traditional digital payment instruments, tokenised money incorporates smart contracts, enabling automatic enforcement of contractual terms without intermediaries. It serves a dual function as both a payment method and a collateral asset for financial contracts, offering greater efficiency, security, and traceability. Its programmability reduces human error, minimises fraud, and lowers custodial and settlement costs, particularly in complex financial transactions involving future obligations.
Ozdenoren and Yuan describe how tokenised money acts as a collateral multiplier, expanding the supply of secure and transparent assets while reducing reliance on sovereign bonds – thereby mitigating systemic risks such as the ‘dash for cash’ or the sovereign-financial doom loop. Tokenisation also enables the creation of secondary markets, closely integrating funding and market liquidity. While it introduces new risks, including cybersecurity threats and novel financial vulnerabilities, its potential benefits – and seigniorage opportunities for issuers – position tokenised money as a foundational element of future financial infrastructure.
Markus Brunnermeier and Jonathan Payne similarly stress the role of digital payment ledgers in offering a powerful new mechanism to expand access to credit by embedding repayment directly into digital transaction systems. Turning future revenues into ‘digital collateral’, these systems promise to relax borrowing constraints, but their potential is shaped less by technology than by institutional design and confronts a trilemma: no arrangement can simultaneously ensure strong enforcement, limit private rent extraction, and preserve user privacy. According to the authors, this trilemma lies at the heart of the evolving financial architecture.
Brunnermeier and Payne compare three institutional approaches. The first is BigTech platforms, which can enforce repayment by controlling trade and payment flows, using proprietary tokens and internal ledgers, but create risks of monopoly power and privacy loss. The second is public options – from basic infrastructure like FedNow to full programmable CBDCs – that can serve as inclusive, transparent alternatives, but may weaken enforcement or require trade-offs on privacy. The third approach is regulatory ‘co-opetition’ between platforms, which encourages enforcement through shared data and coordinated default tracking, while using competition to suppress rents. All these models face technical and governance complexities, particularly in enforcing privacy and limiting systemic risk. The authors conclude that, ultimately, expanding access to credit through digital payment systems demands a nuanced balance across enforcement, rent extraction, and privacy.
Wenqian Huang describes how DeFi is transforming financial infrastructure by enabling trading and lending without traditional intermediaries. At the core of this system are decentralised exchanges and lending protocols that use smart contracts to automate market functions. Decentralised exchanges replace order books with pooled liquidity and algorithmic pricing, enabling large trades with minimal price dislocation for near-par instruments like stablecoins. DeFi lending protocols mimic collateralised finance by letting users borrow against tokenised assets, with automatic margin calls enforced by code. These innovations are now expanding into real-world asset markets, such as tokenised real estate.
Huang argues that the integration of DeFi mechanisms into tokenised real-world asset markets offers efficiency gains but also introduces risks. As DeFi becomes increasingly intertwined with fiat systems and real assets, the challenge for regulators is to craft oversight that acknowledges decentralisation while mitigating systemic risk. Ultimately, DeFi’s contribution may not lie in replacing existing institutions but in reshaping our understanding of resilient and efficient market design.
Claudio Tebaldi argues that digital adoption, rising incomes, and growing global interest have brought a younger, more diverse cohort of retail investors into financial markets. While these investors now access a broad range of complex financial products, their financial literacy is often low and their understanding of product risks inadequate. De facto, digital innovation brings with it a form of technology-driven deregulation, and finding the right balance between fostering innovation and protecting retail investors is difficult. While some regulatory environments, such as that of the European Union, emphasise consumer protection through rules and oversight, they often limit scalability and participation, raising concerns about accessibility and innovation. In some cases, platform design – rather than regulation – bears the burden of educating and guiding users.
Tebaldi proposes a regulatory framework that balances the goals of consumer protection, large-scale participation, and inclusive stakeholder governance. He argues that AI-powered robo-advisory tools offer promise in bridging the education gap at scale. To improve governance, token issuers should meet governance standards comparable to those common in traditional finance.
With Martín Gonzalez-Eiras. Journal of Economic Dynamics and Control 178, 105145. September 2025. PDF, PDF of appendices C, D, E.
We develop a single-state model of epidemic control and equilibrium dynamics, and we show that its simplicity comes at very low cost during the early phase of an epidemic. Novel analytical results concern the continuity of the policy function; the reversal from lockdown to stimulus policies; and the relaxation of optimal lockdowns when testing is feasible. The model’s enhanced computational efficiency over SIR-based frameworks allows for the quantitative assessment of various new scenarios and specifications. Calibrated to reflect the COVID-19 pandemic, the model predicts an optimal initial activity reduction of 38 percent, with subsequent stimulus measures accounting for one-third of the welfare gains from optimal government intervention. The threat of recurrent infection waves makes the optimal lockdown more stringent, while a linear or near-linear activity-infection nexus, or strong consumption smoothing needs, reduce its stringency.
VoxEU, June 30, 2025. With Cyril Monnet and Remo Taudien. HTML.
From the text:
To judge the incentive effects of a public liquidity backstop framework, ideally one would assess its contribution to the overall too-big-to-fail subsidy. However, isolating this contribution is empirically challenging. To estimate the broader too-big-to-fail subsidy, we conduct a quantitative analysis based on the industry-standard CreditGrades framework (Merton 1974, Finkelstein et al. 2002). Using publicly available data for 2022 and applying conservative assumptions about recovery rates and asset volatility, we estimate that UBS Group AG benefited from an annual senior debt subsidy of approximately $2.9 billion–somewhat below the range reported in comparable studies.
This finding underscores the need for a regulatory framework that effectively addresses the incentive distortions created by such subsidies. Any meaningful solution should adopt a holistic approach, targeting the combined consequences of too-big-to-fail status. Crucially, corrective measures should operate ex-ante –targeting the incentives of current management and shareholders–rather than relying on punitive conditions imposed during a crisis. Ex-post penalties risk undermining the resolution process (‘throwing out the baby with the bathwater’) and may lack political feasibility in the face of imminent failure. Importantly, and contrary to the approach outlined in the Swiss proposal, effective regulation must also be independent of a bank’s current financial performance, which reflects past decisions and random shocks rather than the decisions that regulation seeks to influence.
With Cyril Monnet and Remo Taudien. CEPR Discussion Paper 20309, May 2025. PDF.
The proposed revision of the Swiss Banking Act introduces a public liquidity backstop (PLB) for distressed systemically important banks (SIBs), in part to facilitate resolution. We examine the impact of the PLB on fiscal balances, welfare, and the incentives of bank shareholders and management. A PLB, like too-big-to-fail (TBTF) status, acts as a subsidy for non-convertible bonds, which can create negative externalities. Corrective measures should be implemented before the PLB is activated to align incentives with societal interests. We conservatively estimate that UBS Group’s TBTF status results in funding cost reductions of at least USD 2.9 billion in 2022. The risk for Switzerland of hosting SIBs warrants additional precautionary savings.
An executive order issued on January 23, 2025, aims at protecting “Americans from the risks of Central Bank Digital Currencies (CBDCs), which threaten the stability of the financial system, individual privacy, and the sovereignty of the United States, including by prohibiting the establishment, issuance, circulation, and use of a CBDC within the jurisdiction of the United States.”
The executive order defines CBDC as “a form of digital money or monetary value, denominated in the national unit of account, that is a direct liability of the central bank.”
As (a reader of) Matt Levine’s newsletter points out, the two statements combined have wide ranging implications. Reserves, which are issued by the Fed and which banks use to pay each other, are a form of digital money; they are denominated in the national unit of account; and they are a direct liability of the central bank. So, their issuance and use is prohibited now. This would mean the end of the monetary architecture as we know it. Or, the executive order was just not carefully drafted.
Unlike in the executive order, retail CBDC is typically defined as “reserves for all,” that is digital; in the national unit of account; a direct liability of the Fed; and ACCESSIBLE TO EVERYBODY rather than just banks. Prohibiting CBDC as typically understood would not be as wide ranging, but still not necessarily a good idea. As Morten Bech has pointed out, CBDC = MM0GA or
CBDC = make M0 great again.
HT to Beatrice Weder di Mauro.
With Cyril Monnet and Remo Taudien. University of Bern Discussion Paper 25.01, January 2025. PDF.
The proposed revision of the Swiss Banking Act introduces a public liquidity backstop (PLB) for distressed systemically important banks (SIBs), in part to facilitate resolution. We examine the impact of the PLB on fiscal balances, societal welfare, and the incentives of bank shareholders and management. A PLB, like too-big-to-fail (TBTF) status, acts as a subsidy for non-convertible bonds, which can create negative externalities. Corrective measures must be implemented before the PLB is activated to align incentives with societal interests. We conservatively estimate that Swiss SIBs’ TBTF status results in funding cost reductions far greater than the proposed ex-ante compensation, with UBS Group AG alone gaining at least USD 2.9 billion in 2022. The risk for Switzerland of hosting SIBs warrants additional precautionary savings.
To analyze the transmission from interest rate policies to output and inflation, many academics and central bank economists use the basic New Keynesian (NK) ‘three-equation model’ and its various extensions. A key factor responsible for the model’s success is the seeming alignment with conventional wisdom—some of the model features can be framed in the language of familiar business cycle narratives, as found in newspapers, central bank communication, or introductory macroeconomics courses. But the resemblance between model and narratives is deceptive and the framing misleading. Practitioners and journalists might think that they base their reasoning on the NK model, but typically that’s not what they do.
So, what does the NK model really say? Few writers have identified the model’s fundamental elements more clearly than Stanford’s John Cochrane. In the context of his work on the ‘Fiscal Theory of the Price Level’ (FTPL), which partly overlaps with the NK model, he has thoroughly scrutinized the latter framework and compared it to prevalent views among policy makers and commentators. His verdict is harsh. In a recent blog post he writes:
There is a Standard Doctrine, explained regularly by the Fed, other central banks, and commentators, and economics classes that don’t sweat the equations too hard: The Fed raises interest rates. Higher interest rates slowly lower spending, output, and hence employment … slowly bring down inflation … So, raising interest rates lowers inflation …
The trouble is, standard economic theory, in essentially universal use since the 1990s, including all the models used by central banks, don’t produce anything like this mechanism. We do not have a simple economic theory, vaguely compatible with current institutions, of the Standard Doctrine.
At the heart of the NK model are three equations: One that nearly all macroeconomists take seriously, another one that many consider reasonable, and a final equation that only a few would wholeheartedly endorse. The first equation is the consumption Euler equation. It represents the fundamental concept of choice in the face of scarcity, capturing substitution towards cheaper goods: When the price of apples relative to oranges falls, households consume relatively more apples. The same logic applies with respect to current and future consumption: Higher real interest rates render future relative to current consumption cheaper, i.e., higher real interest rates go hand in hand with stronger growth. Accordingly, a higher nominal interest rate is associated with a strengthening of economic activity unless it triggers an even stronger increase in inflation.
Higher real interest rates make output higher in the future than today, and so raise output growth. The best we can hope [for in terms of reconciling Standard Doctrine and Euler equation] … is to have output jump down instantly today when the interest rate rises.
The second equation, the ‘Phillips curve,’ represents firms’ price setting. It relates current as well as expected future inflation to contemporaneous output. Underlying this second equation is the assumption that firms compete against each other and try to charge a markup over cost. Price increases by other firms as well as higher production, which pushes up costs, induce firms to raise their own prices as soon as they get a chance (sticky prices). But again, this is not easy to reconcile with the ‘Standard Doctrine:’
Again the sign is “wrong.” Suppose the economy does soften, lower [production] … A softer economy means lower inflation … relative to future inflation. It means inflation rises over time. At best, perhaps we can get inflation to jump down immediately, but then inflation still rises over time. … (This is an old puzzle, pointed out by Larry Ball in 1993.)
The final, least credible equation represents an interest rate rule whose coefficients satisfy the ‘Taylor principle.’ The assumption is that the interest rate set by the central bank systematically responds to inflation (and potentially output), and strongly so. The third equation and the ‘Taylor principle’ do not bear resemblance to real-world central banking, although many central bankers and journalists talk about ‘Taylor rules,’ which is not the same as the ‘Taylor principle.’ Rather, the equation and the principle are needed for technical reasons that relate to the dynamic properties of difference equations and more specifically, the number of unstable eigenvalues and jump variables. Paired with the assumption that output and inflation eventually return to their pre-shock trends, the equation subject to the ‘Taylor principle’ forces output and inflation to jump to specific values after the system is shocked.
Cochrane rejects the interest rate rule subject to the ‘Taylor principle’ as bogus. Instead, he favors an ‘FTPL’ mechanism to pin down output and inflation after a shock. According to the ‘FTPL,’ fiscal policy makers set primary surpluses ‘actively,’ i.e., independently of inflation. Inter temporal government budget balance then implies that changes in the economic environment, for instance a change in interest rates, give rise to an equilibrating jump in the aggregate price level, so fiscal policy pins down inflation.
Obviously, I think the fiscal theory story makes a lot more sense. The Fed does not have an “equilibrium selection policy.” The Fed does not deliberately destabilize the economy. The central story of how interest rates lower inflation is that the Fed threatens to blow up the economy in order to get us to jump to a different equilibrium. If you said that out loud, you wouldn’t get invited back to Jackson Hole either, though equations of papers at Jackson Hole say it all the time. The Fed loudly announces that it will stabilize the economy — that if inflation hits 8%, the Fed will do everything in its power to bring inflation back down, not punish us with hyperinflation.
Given the weak conceptual and empirical foundations of the third equation and the ‘Taylor principle,’ Cochrane is right to dispute the conventional argument that inflation is pinned down by this very equation—the Fed’s threat to ‘blow up the economy.’ But the FTPL mechanism he favors relies on a similar threat, in this case by fiscal policy makers. With ‘active’ fiscal policy, inflation is pinned down by the inter temporal government budget balance requirement; unless inflation assumes the ‘right’ value, government debt spirals out of control.
Independently of whether you believe in the third equation of the NK model subject to the ‘Taylor principle’ or in ‘active’ fiscal policy along the lines of the ‘FTPL,’ the implications are stark:
But we don’t have to take sides on that debate, because the result is the same, and the question here is whether current models can reproduce the Standard Doctrine. When interest rates rise, we can have an instantaneous jump down in inflation, that lasts one period before inflation rises again.
But this is a long way from the Standard Doctrine. First, we still have inflation that jumps down instantly and then rises over time, where the Standard Doctrine wants inflation that slowly declines over time. That sign is still wrong.
Second, the jump occurs because, coincidentally, fiscal policy tightened at the same time. Whether that happened independently, by fiscal-monetary coordination, or because the Fed made an equilibrium-selection threat and Congress went along doesn’t matter. Without the tighter fiscal policy you don’t get the lower inflation. So this is not really the effects of monetary policy. At best it is the effect of a joint monetary and fiscal policy.
Moreover, the fiscal/equilibrium selection business is doing all the work. You can get exactly the same unexpected inflation decline (or rise) with no change in interest rate at all. …
The mechanism is also a long way from the Standard Doctrine. The decline in inflation has nothing to do with the higher interest rates. There are no higher real interest rates anyway in this story. There is a fall in aggregate demand, but it comes entirely from tighter fiscal policy, having nothing to do with higher interest rates.
Cochrane is right to argue that the NK model’s transmission from interest rates to output and inflation has fiscal consequences, which the literature typically disregards. Consider the consequences of a shock. If we insist on the third equation subject to the ‘Taylor principle,’ then the inflation jump that guarantees stable system dynamics implies a revaluation of outstanding nominal debt (if there is some), which in turn requires fiscal policy makers to adjust future primary surpluses. So, the standard model subject to the ‘Taylor principle’—the Fed’s threat to blow up the world—implies that a shock to the interest rate (a ‘monetary policy shock’) forces fiscal responses. Cochrane asks, why researchers do not pay more attention to the fiscal consequences of ‘monetary policy shocks,’ and why they interpret the output and inflation dynamics resulting from the shock as the effects of monetary rather than monetary-and-fiscal policy.
If we instead dump the third equation and replace it with the notion of ‘active’ fiscal policy, then the shock cannot change future primary surpluses. Now, the inter temporal government budget balance requirement joint with the predetermined level of nominal debt (if some is outstanding) pins down contemporaneous inflation. And according to Cochrane, the traditional output and inflation adjustment paths to the ‘monetary policy shock’ are gone.
Cochrane discusses how the problems of the NK model transcend that model—they are not a consequence of the price stickiness assumption, i.e., the ‘Phillips curve.’ Even without price stickiness, the dynamics according to the ‘Standard Doctrine’ are hard for the Euler equation and the third equation to match.
The only way to get inflation and output to decline at all is to pair the interest rate rise with a FTPL fiscal shock or a multiple-equilibrium-selection-threat by the Fed, which induces a fiscal shock. Even then, we still get inflation that jumps down and then rises, and has nothing to do with the mechanism of the Standard Doctrine. The fiscal shock or equilibrium-selection threat is still coincidental with raising interest rates, and indeed has to fight the fact that higher interest rates want to raise inflation.
Cochrane suggests long-term debt as a potential model ingredient to better align model predictions under the ‘FTPL’ approach with the data. He also speculates why the NK model has been so successful in academia and central banks in spite of its dubious mechanics:
How could this state of affairs have gone on so long, that the basic textbook model produces the opposite sign from what everyone thinks is true, for 30 years? Well, interpreting equations is hard.
This paper contains more discussion and analysis. Have a look yourself and be prepared for a new business cycle framework.
Neue Zürcher Zeitung, January 25, 2024. PDF. HTML.
Kritik an der Höhe der SNB-Ausschüttungen ist somit nur gerechtfertigt, wenn die Finanzverantwortlichen von Bund und Kantonen die genannten Hebel nicht in Bewegung setzen können. Einer solchen Kritik muss sich die SNB stellen. Sie hat die Kompetenz, ihre Bilanz nach geldpolitischen Erfordernissen zu gestalten, aber eine mechanische Rückstellungspolitik entspricht diesem Erfordernis kaum. Die SNB sollte daher begründen, warum eine stabilitätsorientierte Politik vor dem Hintergrund der geldpolitischen Analyse und plausibler Szenarien die gewählte Bilanzstruktur und Rückstellungspolitik erfordert.
Ebenso wichtig ist ein Perspektivenwechsel in der politischen Diskussion. Mehr Interesse als SNB-Ausschüttungen verdienen das Nettovermögen von Bund und Kantonen sowie der Einfluss des SNB-Jahresergebnisses darauf. Ausserdem sollten sich Bund und Kantone darum bemühen, ihre Budgets aus eigener Kraft von schwankenden SNB-Ausschüttungen zu entkoppeln.
Alle Beteiligten sollten sich bewusst sein, dass eine Änderung der Regelungen für SNB-Ausschüttungen alle paar Jahre kein gutes Licht auf die Solidität dieser Regeln und auf die beteiligten Institutionen wirft.
The Bank of England and HM Treasury have formed a CBDC Academic Advisory Group (AAG).
The AAG will bring together a diverse, multi-disciplinary group of experts to encourage academic research, debate and promote discussion on a range of topics, to support the Bank and HM Treasury’s work during the design phase of a digital pound.
Members:
| Alexander Edmund Voorhoeve | Professor of Philosophy | London School of Economics |
| Alistair Milne | Professor of Financial Economics | Loughborough University |
| Andrew Theo Levin | Professor of Economics | Dartmouth College |
| Anna Omarini | Tenured Researcher and an Adjunct Professor in Financial Markets and Institutions | Bocconi University |
| Bill Buchanan | Professor of Computing | Edinburgh Napier University |
| Burcu Yüksel Ripley | Senior Lecturer of Law | University of Aberdeen |
| Danae Stanton Fraser | Professor in Human Computer interaction, CREATE Lab | University of Bath |
| Darren Duxbury | Professor of Finance | Newcastle University |
| David Robert Skeie | Professor of Finance | University of Warwick |
| Davide Romelli | Associate Professor in Economics | Trinity College Dublin |
| Dirk Niepelt | Professor of Macroeconomics | University of Bern & CEPR |
| Doh-Shin Jeon | Professor of Economics | Toulouse School of Economics |
| Gbenga Ibikunle | Professor and Chair of Finance | University of Edinburgh |
| Iwa Salami | Reader (Associate Professor) in Law and Director, Centre of Fintech | University of East London |
| Jonathan Michie | Pro-Vice-Chancellor and Professor of Innovation & Knowledge Exchange | Kellogg College, University of Oxford |
| Marta F. Arroyabe | Reader & Deputy Head of Group | University of Essex |
| Michael Cusumano | Deputy Dean and Professor of Management | Sloan School of Management, MIT |
| Pinar Ozcan | Professor of Entrepreneurship and innovation | Said Business School, University of Oxford |
| Sheri Marina Markose | Professor of Economics | University of Essex |
Katrin Assenmacher (ECB), Peter Bofinger (U of Wurzburg), Rod Garratt (UCSB, BIS), Alexandre Stervinou (Banque de France). Chair: Dirk Niepelt. One of the opening events at CEPR’s Paris Symposium 2023.
Organizer: Tessa Ogden, Dirk Niepelt.
Conference jointly organized by CEPR’s RPN FinTech & Digital Currencies and the European Central Bank. Welcome speech by Piero Cippolone, keynote by Fabio Panetta.
Organizers: Toni Ahnert, Katrin Assenmacher, Massimo Ferrari Minesso, Peter Hoffmann, Arnaud Mehl, Dirk Niepelt.
CEPR’s conference website. ECB’s website with videos. Website with pictures.
Panel at the Bank of Canada/Riksbank Conference on the Economics of CBDC, November 16, 2023. Video.
Fed Governor Christopher Waller, UCSB professor Rod Garratt and myself assess the case for central bank digital currency and stable coins and respond to excellent questions from the audience.
In Christos V. Gortsos and Rolf Sethe, editors: Central Bank Digital Currencies, EIZ Publishing, ch. 3, Zurich, October 2023. PDF.
VoxEU, September 27, 2023. HTML.
From the conclusions:
… it is critical to account for indirect in addition to direct social costs and benefits when ranking monetary architectures.
… the costs and benefits we consider point to an important role of central bank digital currency in an optimal monetary architecture unless pass-through funding is necessary to stabilise capital investment and very costly.
… the interest rate on CBDC should differ from zero and from the rate on reserves.
From the text:
Notes: The dark grey area represents the efficiency advantage of CBDC needed to make it less costly than a two-tier system with optimum reserve holdings. The light grey area displays the same object but based on actual US reserve holdings rather than model-implied optimal ones. These distributions allow for pass-through costs and tax distortions, quantified by assuming taxing households causes deadweight burdens of 25% per tax dollar. The distributions are based on two million realisations.