August 25th, 2020

Escaping the Bleak

DIGITAL CURRENCIES

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.
 Full Article

July 27th, 2020

Avey From Cane

PUBLIC HEALTH FEDERALISM

Catastrophic deficiencies in the federal response to the Covid-19 pandemic have led to renewed discussion over federalism and its discontents. The divergence among state responses to the crisis in the absence of federal guidance has produced analyses of Trump’s unique, “narrow” sense of federalism, pronouncements of “a new era of federalism,” and hopes for a solidarity-minded “civic federalism.”

In a 1997 article, health law professor JAMES G. HODGE JR. analyzes the impact of state-centric “new federalism” jurisprudence on the government’s ability to realize public health goals. Hodge places new federalism in the context of decades of increasing intrusion by the federal government on states’ power over public health policy:

"The impact of new federalism on the field of public health law is seen in the history of public health regulation. The metamorphosis of public health regulation from purely local to predominantly national means resulted from increased federal presence in the field corresponding to a deemphasis on traditional federalism. It is an inescapable conclusion that an increased federal presence shifted public health goals. National public health priorities dominate local ones. New federalism restrains the federal intrusion on state public health powers by requiring Congress to operate within the constraints of the political process. As a result, state police powers exercised in the interest of public health are strengthened emphatically by the political process confining federal authority to enter the field."

Full paper available here.

  • In an article published this April, Hodge reassesses federal vs. state public health powers in light of disparate responses to the pandemic: "Americans are left wondering, 'which level of government is actually in charge here?' In the face of a pandemic like Covid-19, the answer under principles of federalism is increasingly clear: neither." Link.
  • "American federalism—with its fissures and fractures—haunts the state of emergency." A March post from Phillip Rocco. Link. (See also Rocco's recent post on fiscal federalism in Notes on the Crises.) Along similar lines: Rocco, Daniel Béland, and Alex Waddan on the fiscal barriers to pandemic response. Link. And Nicole Huberfeld, Sarah H. Gordon, and David K. Jones argues that the pandemic has magnified the state-level inequities fostered by federalism. Link.
  • For another view on the relationship between federalism and public health: A 2014 paper by Adam Varvel on the West Nile outbreak of 1999. Link. See also: A post-SARS policy brief on the impact of federalism on international health regulations. Link.
 Full Article

July 20th, 2020

Dramatic Fire

CENTRAL BANKS AND CLIMATE

Common wisdom around central bank independence (CBI) is increasingly a matter of debate. Before the Covid-19 crisis, a growing number of scholars and commentators have proposed means by which central banks can address looming climate catastrophe—either by integrating new risks into their assessments, or by promoting more active resource allocation—and argued that central bank's attention to climate risk has focused too squarely on financial stability.

In a 2018 working paper, SIMON DIKAU and ULRICH VOLZ outline how, despite the "second-best" nature of this kind of intervention, the shift is already occurring:

"Allocating financial resources toward or away from certain sectors and companies implies favoring certain segments of the economy over others and appears to be incompatible with our modern understanding of independent central banks. Nonetheless, many central banks in emerging and developing economies have resorted to these policies as viable, second-best solutions to promote sustainable development and green investment. The notion of the neutrality of monetary policy has come under intense scrutiny more recently, not least in the context of discussions about the distributional consequences of the negative interest and quantitative easing policies adopted by major central banks. It is apparent that central banks in developing and emerging economies especially, and in Asia in particular, have been at the forefront of using a broad range of instruments to address environmental risk and encourage green investment."

Full paper available here.

  • On VoxEU, Markus K. Brunnermeier and Jean-Pierre Landau on the applicability of central banking tools for the climate crisis: "The conventional wisdom on monetary policy is that it has no impact on long-term growth; its influence is mostly felt on a 1.5 to 2.5 years horizon. By contrast, climate change is all about the long term; effects and policies materialize and matter over several decades." Link.
  • An IMF report by Pierpaolo Grippa, Jochen Schmittmann, and Felix Suntheim surveys the field: "Climate change will affect monetary policy by slowing productivity growth (for example, through damage to health and infrastructure) and heightening uncertainty and inflation volatility." Link.
  • As governor of the Bank of England, Mark Carney gave an oft-cited 2015 speech, proposing a scheme of physical risks, liability risks, and transition risks. Link. And Jean Boivin argues for abandoning CBI in the face of Covid. Link.
 Full Article