Accepted for publication in the Journal of Monetary Economics, with Markus Brunnermeier. (NBER wp.)
When does a swap between private and public money leave the equilibrium allocation and price system unchanged? To answer this question, the paper sets up a generic model of money and liquidity which identifies sources of seignorage rents and liquidity bubbles. We derive sufficient conditions for equivalence and apply them in the context of the “Chicago Plan”, cryptocurrencies, the Indian de-monetization experiment, and Central Bank Digital Currency (CBDC). Our results imply that CBDC coupled with central bank pass-through funding need not imply a credit crunch nor undermine financial stability.
Finanz und Wirtschaft, June 29, 2019. PDF. Related article in Oekonomenstimme, July 9, 2019. HTML.
It is not central bank digital currency (CBDC) per se which might act as a game changer in financial markets. What will be key is how central banks accommodate the introduction of CBDC.
In principle, this accommodation can go very far, to the point where the introduction of CBDC does not affect macroeconomic outcomes.
But such complete accommodation is unlikely. On the one hand, central banks will want to exploit the new monetary policy options that CBDC opens up; that is, central banks will not choose to fully accommodate.
On the other hand, the introduction of CBDC increases transparency and this will increase political pressure; as a consequence, central banks will not be able to fully accommodate.
Accepted for publication in the International Journal of Central Banking. PDF.
This paper offers a macroeconomic perspective on the “Reserves for All” (RFA) proposal to let the general public hold electronic central bank money and transact with it. I propose an equivalence result according to which a marginal substitution of outside money (e.g., RFA) for inside money (e.g., deposits) does not affect macroeconomic outcomes. I identify key conditions for equivalence and argue that these conditions likely are violated, implying that RFA would change macroeconomic outcomes. I also relate the analysis to common arguments found in discussions on RFA and point to inconsistencies and open questions.
Review of Economic Dynamics 18(4), October 2015, with Martín Gonzalez-Eiras. PDF.
Traditional “economic equivalence” results, like the Ricardian equivalence proposition, define equivalence classes over exogenous policies. We derive “politico-economic equivalence” conditions that apply in environments where policy is endogenous and chosen sequentially. A policy regime and a state are equivalent to another such pair if both pairs give rise to the same allocation in politico-economic equilibrium. The equivalence conditions help to identify factors that render institutional change non-neutral and to construct politico-economic equilibria in new policy regimes. We exemplify their use in the context of several applications, relating to social security reform, tax-smoothing policies and measures to correct externalities.