Category Archives: Notes

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.

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

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.

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.


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.

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.


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.