“Vollgeld, Liquidität und Stabilität (100% Money, Liquidity and Stability),” NZZ, 2014

Neue Zürcher Zeitung, May 12, 2014. PDF. Extended version in Ökonomenstimme, May 13, 2014. HTML.

  • A 100% money regime reduces the risk of credit bubbles, but requires more and better fine-tuning by the central bank.
  • Central banks can already implement higher reserve requirements. If the fact that they don’t reflects policy failure, then the 100% money proposal risks handing more power to one source of the problem.
  • A 100% money regime increases financial stability, at least temporarily, but it forces banks to find new sources of funding and lowers the interest rate for depositors, which is fine.
  • If lender of last resort support by the central bank occurs at too low interest rates then seignorage revenues are privatised and costs socialised under the current regime. Moving to a 100% money regime would help but so would simple Pigouvian taxation.
  • How can a 100% money regime be enforced if market participants end up coordinating to use other securities than deposits as means of payment?
  • More stable deposits in a 100% money regime do not imply a more stable banking system unless other regulation is imposed that completely prevents “maturity transformation.”
  • Aggregate liquidity cannot be created out of nothing, with or without deposit insurance.
  • Societies have to take a stand on whether they want to guarantee broader monetary aggregates than base money. If so, the cost of the guarantee should be privatised. Problems arise if societies pretend not to provide such guarantees but central banks nevertheless feel obliged to step in ex post and market participants are aware of that fact ex ante; bad, self-fulfilling equilibria are the consequence.
  • Commitment on the part of policy makers is key; it requires independent central bankers and regulators.