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2. Securing macroeconomic and monetary stability with a Federal Reserve–backed digital currency
- Author:
- Julia Coronado and Simon Potter
- Publication Date:
- 03-2020
- Content Type:
- Policy Brief
- Institution:
- Peterson Institute for International Economics
- Abstract:
- The US monetary system faces significant challenges from advances in technology and changes in the macroeconomy that, left unaddressed, will threaten the stability of the US economy and financial system. At the same time, low interest rates mean that central banks will not have the policy ammunition they had in the past during the next recession. The Federal Reserve needs new tools to meet its mandates of price stability and maximum employment. It also needs to preserve the safety and soundness of the financial system in a rapidly digitizing world. The authors propose a Fed-backed digital currency to solve both problems. Their proposal creates a regulated system of digital currency accounts for consumers managed by digital payment providers and fully backed by reserves at the Fed. The system would be limited in size, to preserve the functions and stability of the existing banking system. Fed backing would mean low capital requirements, which would in turn facilitate competition. Low fees and no minimum balance requirements in the new system would also help financial institutions reach the roughly 25 percent of the US population that is currently either unbanked or underbanked. Digital accounts for consumers could also provide a powerful new stabilization tool for both monetary and fiscal policies. For fiscal policy, it could facilitate new automatic stabilizers while also allowing the Fed to provide quantitative easing directly to consumers. This tool could be used in a timely manner with broad reach to all Americans.
- Topic:
- Economics, Government, Monetary Policy, Banks, and Macroeconomics
- Political Geography:
- North America and United States of America
3. Reviving the potency of monetary policy with recession insurance bonds
- Author:
- Julia Coronado and Simon Potter
- Publication Date:
- 04-2020
- Content Type:
- Policy Brief
- Institution:
- Peterson Institute for International Economics
- Abstract:
- In the second part of their Policy Brief, Coronado and Potter discuss how the system of digital payment providers (DPPs) proposed in their first Policy Brief on this topic adds a new weapon to the monetary toolkit that could be implemented in a timely, effective, and inclusive manner. They describe how a digital currency backed by the Federal Reserve could augment automatic fiscal stabilizers and—more importantly—harness the power of “helicopter” money or quantitative easing directly to consumers in a disciplined manner. To implement QE directly to consumers, Coronado and Potter propose the creation of recession insurance bonds (RIBs)—zero-coupon bonds authorized by Congress and calibrated as a percentage of GDP sufficient to provide meaningful support in a downturn. Congress would create these contingent securities; Treasury would credit households’ digital accounts with them. The Fed could purchase them from households in a downturn after its policy rate hits zero. The Fed’s balance sheet would grow by the value of RIBs purchased; the initial matching liability would be deposits into the DPP system. The mechanism is easy for consumers to understand and could boost inflation expectations more than a debt-financed fiscal stimulus could.
- Topic:
- Economics, Government, Monetary Policy, and Insurance
- Political Geography:
- North America and United States of America
4. Automatic stabilizers in a low-rate environment
- Author:
- Olivier Blanchard and Lawrence H. Summers
- Publication Date:
- 02-2020
- Content Type:
- Policy Brief
- Institution:
- Peterson Institute for International Economics
- Abstract:
- With interest rates persistently low or even negative in advanced countries, policymakers have barely any room to ease monetary policy when the next recession hits. Fiscal policy will have to play a major and likely dominant role in stimulating the economy, requiring policymakers to fundamentally reconsider fiscal policy. Blanchard and Summers argue for the introduction of what they call “semiautomatic” stabilizers. Unlike purely automatic stabilizers (mechanisms built into government budgets that automatically—without discretionary government action or explicit triggers—increase spending or decrease taxes when the economy slows or enters a recession), semiautomatic stabilizers are targeted tax or spending measures that are triggered if, say, the output growth rate declines or the unemployment rate increases beyond a specified threshold. The authors argue that the trigger should be changes in unemployment rather than changes in output, and the design of semiautomatic stabilizers, whether they focus on mechanisms that rely primarily on income or on intertemporal substitution effects (changing the timing of consumption), depends crucially on the design of discretionary policy.
- Topic:
- Economics, Government, Monetary Policy, and Finance
- Political Geography:
- Global Focus and United States of America
5. A program for strengthening the Federal Reserve's ability to fight the next recession
- Author:
- David Reifschneider and David Wilcox
- Publication Date:
- 03-2020
- Content Type:
- Working Paper
- Institution:
- Peterson Institute for International Economics
- Abstract:
- If the Federal Reserve does not decisively change the way it conducts monetary policy, it will probably not be capable of fighting recessions in the future as effectively as it fought them in the past. This reality helped motivate the Fed to undertake the policy framework review in which it is currently engaged. Researchers have suggested many steps the Fed could take to improve its recession-fighting ability; however, no consensus has emerged as to which of these steps would be both practical and maximally effective. This paper aims to fill that gap. It recommends that the Fed commit as soon as possible to a new approach for fighting recessions, involving two key elements. First, the Fed should commit that whenever it runs out of room to cut the federal funds rate further, it will leave the rate at its minimum level until the labor market recovers and inflation returns to 2 percent. Second, the Fed should commit that under the same circumstances, it will begin to purchase longer-term assets in volume and will continue such purchases until the labor market recovers. If the forces driving the next recession are not unusually severe, this framework might allow the Fed to be as effective at fighting that recession as it was in the past. If the next recession is more severe, however, the Fed will probably run out of ammunition even if it takes the two steps recommended here. Therefore, both monetary and fiscal policymakers should consider yet other steps they could take to enhance their ability to fight future recessions.
- Topic:
- Economics, Monetary Policy, and Federal Reserve
- Political Geography:
- North America, Global Focus, and United States of America
6. Twin Deficits Phenomenon in the West African Economic and Monetary Union Countries: Panel Data Analysis
- Author:
- Kouassi Yeboua
- Publication Date:
- 01-2020
- Content Type:
- Research Paper
- Institution:
- African Economic Research Consortium (AERC)
- Abstract:
- For a long time, the West African Economic and Monetary Union (WAEMU) countries have been experiencing persistently high budget and current deficits. This study was undertaken to empirically test the “Twin Deficits Hypothesis” in these countries. The analysis was conducted within the framework of the Panel Vector autoregressive (VAR) approach over the period 1975–2013. In contrast to the conventional view which claims a one-way relationship between budget and current account deficits, the results show that budget deficits lead to a deterioration in the current account balance, and vice versa (bilateral relationship). We also found that budget deficits have an impact on current account balance mainly through imports.
- Topic:
- Economics, Monetary Policy, Budget, Economic Policy, and Macroeconomics
- Political Geography:
- Africa and West Africa
7. The Exchange Rate Pass-Through to Inflation and its Implications for Monetary Policy in Cameroon and Kenya
- Author:
- Dongue Ndongo Patrick Revelli
- Publication Date:
- 01-2020
- Content Type:
- Research Paper
- Institution:
- African Economic Research Consortium (AERC)
- Abstract:
- Understanding how domestic prices adjust to the exchange rate enables us to anticipate the effects on inflation and monetary policy responses. This study examines the extent of the exchange rate pass-through to the Consumer Price Index in Cameroon and Kenya over the 1991-2013 period. The results of its econometric analysis shows that the degree of the exchange rate pass-through is incomplete and varied between 0.18 and 0.58 over one year in Kenya, while it varied between 0.53 and 0.89 over the same period in Cameroon. For the long term, it was found to be equal to 1.06 in Kenya and to 0.28 in Cameroon. A structural VAR analysis using impulse-response functions supported the results for the short term but found a lower degree of pass-through for the exchange rate shocks: 0.3125 for Kenya and 0.4510 for Cameroon. It follows from these results that the exchange rate movements remain a potentially important source of inflation in the two countries. Variance decomposition shows that the contribution of the exchange rate shocks is modest in the case of Kenya but significant in that of Cameroon.
- Topic:
- Development, Economics, Monetary Policy, Exchange Rate Policy, Economic Policy, and Inflation
- Political Geography:
- Kenya, Africa, and Cameroon
8. COVID-19’s reality shock for external-funding dependent emerging economies
- Author:
- Alicia Garcia-Herrero and Elina Ribakova
- Publication Date:
- 05-2020
- Content Type:
- Policy Brief
- Institution:
- Bruegel
- Abstract:
- COVID-19 is by far the biggest challenge policymakers in emerging economies have had to deal with in recent history. Beyond the potentially large negative impact on these countries’ fiscal accounts, and the related solvency issues, worsening conditions for these countries’ external funding are a major challenge.
- Topic:
- Monetary Policy, Regulation, Finance, Economy, Central Bank, and COVID-19
- Political Geography:
- Europe, Asia, and Latin America
9. Money, Stability, and Free Societies
- Author:
- Steve H. Hanke
- Publication Date:
- 06-2020
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- Monetary instability poses a threat to free societies. Indeed, currency instability, banking crises, soaring inflation, sovereign debt defaults, and economic booms and busts all have a common source: monetary instability. Furthermore, all these ills induced by monetary instability bring with them calls for policy changes, many of which threaten free societies. One who understood this simple fact was Karl Schiller, who was the German Finance Minister from 1966 until 1972. Schiller’s mantra was clear and uncompromising: “Stability is not everything, but without stability, everything is nothing” (Marsh 1992: 30). Well, Schiller’s mantra is my mantra. I offer three regime changes that would enhance the stability in what Jacques de Larosière (2014) has asserted is an international monetary “anti-system.” First, the U.S. dollar and the euro should be formally, loosely linked together. Second, most central banks in developing countries should be mothballed and replaced by currency boards. Third, private currency boards should be permitted to enter the international monetary sphere.
- Topic:
- Debt, Foreign Exchange, Monetary Policy, Developing World, Inflation, and Currency
- Political Geography:
- Europe, United States of America, and European Union
10. Tariffs and Monetary Policy: A Toxic Mix
- Author:
- Michael D Bordo and Mickey D. Levy
- Publication Date:
- 01-2020
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- The ratcheting up of tariffs and the Fed’s discretionary conduct of monetary policy are a toxic mix for economic performance. Escalating tariffs and President Trump’s erratic and unpredictable trade policy and threats are harming global economic performance, distorting monetary policy, and undermining the Fed’s credibility and independence. President Trump’s objectives to force China to open access to its markets for international trade, reduce capital controls, modify unfair treatment of intellectual property, and address cybersecurity issues and other U.S. national security issues are laudable goals with sizable benefits. However, the costs of escalating tariffs are mounting, and the tactic of relying exclusively on barriers to trade and protectionism is misguided and potentially dangerous. The economic costs to the United States so far have been relatively modest, dampening exports, industrial production, and business investment. However, the tariffs and policy uncertainties have had a significantly larger impact on China, accentuating its structural economic slowdown, and are disrupting and distorting global supply chains. This is harming other nations that have significant exposure to international trade and investment overseas, particularly Japan, South Korea, and Germany. As a result, global trade volumes and industrial production are falling. Weaker global growth is reflected in a combination of a reduction in aggregate demand and constraints on aggregate supply.
- Topic:
- International Trade and Finance, Monetary Policy, Economic growth, Tariffs, and Industry
- Political Geography:
- Japan, China, Europe, Asia, South Korea, Germany, North America, and United States of America