Covid is accelerating the transition away from cash and encouraging the development of state-backed digital currencies. In the past two weeks, the People's Bank of China launched a trial run for digital renminbis in three major cities, and the Boston Fed announced a research initiative examining the technicalities of a Central Bank Digital Currency (CBDC) in the United States.
Despite its purported benefits, the shift threatens to fundamentally alter the priorities of central banks, the structure of payment markets, and the regulatory framework required to ensure financial stability. A 2018 paper by SHEILA DOW considers the limitations of CBDCs for this latter aim.
From the piece:
"The development of Central Bank Digital Currencies feeds into a more general debate on the state’s role in the financial sector. Markets price according to evidence of the past, but also according to conventional judgements about that evidence. Since these conventional bases for pricing are vulnerable to discrete changes which spread across markets, there is considerable scope for financial instability. Innovation in payments systems and digital currency assets is just part of an ongoing process of financial innovation outside the current boundaries of regulation.
Governments have placed the full onus for macroeconomic policy on monetary policy, with fiscal policy restricted to reductions in budgetary deficits and the size of the state. Ironically, since fiscal austerity policies held down aggregate demand and elevated expectations of risk attached to real projects, increases in the money supply were accompanied by low inflation. Consequently, monopoly control of the money supply in order to promote monetary stability seems to be beside the point. Rather the focus needs to be on how the financial sector might be regulated in such a way as to generate credit for useful projects and liquidity as a refuge from uncertainty. Central bank digital currencies may pose benefits, but to consider them the core of a generalised policy to avert future crises is to look in the wrong place."
Link to the article.
- "Time and effort would be better spent on upgrading existing payment networks rather than pursuing options that, for all their innovation, could create more problems than they solve." This week's FT editorial urges caution in rolling out CBDCs mid-crisis. Link. And a Philadelphia Fed working paper from June preempts these concerns, warning that the introduction of digital currencies may turn central banks into "deposit monopolists." Link.
- "If banks are no longer willing to act as financial intermediaries, central banks should consider using CBDCs to circumvent the banking system and inject liquidity directly to those who need it the most." Elham Saeidinezhad and Jack Krupinski present an alternative view on digital currency creation as crisis management (stay tuned for Saeidinezhad's forthcoming piece on Phenomenal World). Link.
- In a series of collected essays published by the European Money and Finance Forum at Bocconi University, analyses of CBDC pilots in Uruguay and Sweden. Link.
- From 2017, Ole Bjerg on the "Policy Trilemma of CBDCs." Link.
Revolution and Redistribution in Colombia
In a 2019 paper, Assistant Professor in Economics at the Universidad de los Andes MARÍA DEL PILA LÓPEZ-URIBE examines why democratic reforms which extended political participation to the Colombian National Peasant Movement between 1957-1985 failed to effectively redistribute wealth.
From the abstract:
"Far from causing an increase in social spending, I show that the state organization of a social movement that extends the political rights of the threatening group can be used to identify rebel leaders and provide private goods to them, in return for preventing social unrest and demobilizing their supporters. I study the context of the organization by the state of the most important social movement in Colombian history—the National Peasant Movement (ANUC)—over a period of almost three decades. Using three newly digitized data sets of Colombian municipalities, I find that rather than leading to broad redistribution to the benefit of the peasantry, the reform instead led to an increase in targeted redistribution in terms of public jobs and lands. In particular, by matching the names of the peasant leaders to the beneficiaries of the land reform, evidence suggests that peasant leaders disproportionately benefited from land reform, especially in municipalities where the communist threat was higher. Finally, I find suggestive evidence that buying off the rebel leaders was an effective counter-revolutionary strategy as it led to fewer revolutionary activities after the support of ANUC was terminated (1972-1985)."
Each week we highlight great work from a graduate student, postdoc, or early-career professor. Have you read any excellent research recently that you'd like to see shared here? Send it our way: firstname.lastname@example.org.
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- "In thinking about logistics, we often consider global supply chains which begin with the manufacturer and end up at Walmart. In doing so, we exclude major transit ports like Singapore, Dubai, or Oman. Those ports are middlemen in global trade routes, and these routes are fundamentally tied to colonial histories." Katy Fox-Hodess in conversation with Laleh Khalili on Phenomenal World. Link.
- The MTA is only the second muni bond issuer to turn to the Fed's recently launched Municipal Liquidity Facility (MLF). A report by the Center for Popular Democracy explains the underutilization: "97% of the 255 cities, states and counties named as eligible for the program are functionally excluded as a result of highly costly and restrictive loan terms." Link.
- "Do Americans prefer to work for businesses that look more like democracies or autocracies?" A new paper from Soumyajit Mazumder and Alan Yan finds that "Americans have a preference for workplace democratization, and the magnitude is economically significant." Link.
- From the most recent issue of Agrarian South: Fabiano Escher on land politics in Brazil, and Paramjit Singh & Inderjeet Singh on states, markets, and agriculture in Punjab. Link and Link.
- "Culture allows societies to accumulate an evolved body of knowledge that is greater than any single individual could learn within their lifetime or fit within their mind." Nathan Nunn on "History as Evolution." Link.
- Amartya Sen, Angus Deaton, and Tim Besley discuss "Welfare Economics: Past, Present, and Future." Link.
- A new IZA Discussion Paper by Luna Bellani, Anselm Hager, and Stephan E. Maurer draws on a "database of Texan state legislators between 1860 and 1900" to "document the persistence of the Southern slave owning elite in political power after the end of the American Civil War." Link. Another new IZA report analyzes how Americans used their stimulus checks. Link.
- Chris Dillow on the feasibility and potential pitfalls of a sovereign wealth fund in the UK. Link.
- "I explore how the tea-growing districts of China and colonial India were integrated into the global division of labor over a formative century of boom-bust expansion. As tea exports from China and India soared and competition grew fiercer, planters, factory overseers, peasants, and government officials shifted their attention from the wealth-creating possibilities of commerce to the value-creating potential of labor and industrial production. Periodic market crises compelled Chinese and colonial Indian officials to seriously question older Smithian theories premised upon the 'sphere of circulation.' Instead, both regional industries pursued interventionist measures focused on the 'abode of production.' In India, officials passed special laws for indentured labor recruitment. In China, reformers organized tea peasants and workers into agrarian cooperatives." Andrew B. Liu's 2015 dissertation, "Competition, Labor, and Economic Thought in Coastal China and Eastern India, 1834-1942." Link.