We analyze policy in a two-tiered monetary system. Noncompetitive banks issue deposits while the central bank issues reserves and a retail CBDC. Monies differ with respect to operating costs and liquidity. We map the framework into a baseline business cycle model with “pseudo wedges” and derive optimal policy rules: Spreads satisfy modified Friedman rules and deposits must be taxed or subsidized. We generalize the Brunnermeier and Niepelt (2019) result on the macro irrelevance of CBDC but show that a deposit based payment system requires higher taxes. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.
John Cochrane argues in the Wall Street Journal that deflation fears are overblown. His main points are:
- According to the Friedman rule, low deflation is beneficial.
- Sticky wages only cause problems if the deflation rate exceeds the rate of productivity growth. This is not in the cards.
- Similarly, the debt burden does not rise dramatically when prices fall by only two percent per annum say.
- Low deflation limits the flexibility of monetary policy but that’s ok.
- Implosive deflation spirals of the type feared by commentators have never been observed. They cannot happen because investors who hold government bonds would sell the securities (fearing default) and try to buy goods instead.