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Dirk Niepelt

Dirk Niepelt

Dirk Niepelt is Director of the Study Center Gerzensee and Professor at the University of Bern. A research fellow at the Centre for Economic Policy Research (CEPR, London), CESifo (Munich) research network member and member of the macroeconomic committee of the Verein für Socialpolitik, he served on the board of the Swiss Society of Economics and Statistics and was an invited professor at the University of Lausanne as well as a visiting professor at the Institute for International Economic Studies (IIES) at Stockholm University.

Articles by Dirk Niepelt

Dictionary Money

4 days ago

On his blog, JP Koning discusses “dictionary money” and the ancient practice of simply redefining what “pound,” say, means.
People have historically advertised prices for wares using a word, or unit of account, the LSD unit being the most prevalent. … from the Latin librae/solidi/denarii. The monarch was responsible for declaring what these words meant. … something to the effect that a pound, or £, was worth, say … silver coin[s]. This definition was subject to change. …
Dictionary systems came to an end when the symbol for money was finally fused directly with the instrument itself. … coins never used to have denominations, or units of account, on their face. …
In the 1700s monarchs began to adopt the practice of inscribing the actual unit of account directly on the coin’s face …

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Limits of Arbitrage and Covered Interest Parity

4 days ago

In a BIS working paper, Dagfinn Rime, Andreas Schrimpf, and Olav Syrstad analyze the apparent breakdown of covered interest parity (CIP). They argue that

CIP holds remarkably well for most potential arbitrageurs when applying their marginal funding rates. With severe funding liquidity differences, however, it becomes impossible for dealers to quote prices such that CIP holds across the full rate spectrum. A narrow set of global top-tier banks enjoys risk-less arbitrage opportunities as dealers set quotes to avert order flow imbalances.

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RTGS Open To Non-Bank Payment Service Providers

4 days ago

The Bank of England has announced plans to open its central-bank-money settlement system (RTGS) to non-bank payment service providers. This, it hopes, will promote competition, innovation, and financial stability by creating more diverse payment arrangements.

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The IMF “In Principle” Approves Funding For Greece

4 days ago

In the FT, Mehreen Khan reports about the IMF’s conditional acceptance to lend to Greece.
The IMF’s “agreement in principle” (AIP) tool draws on a practice where the fund is able to greenlight its involvement in a debtor country, conditional on the government and its creditors agreeing to future debt relief measures.
Of course, the dispute about the merits of debt relief is unresolved. The IMF thinks Greek debt is ‘unsustainable’ and the European creditors should bear more losses, earlier on while some Euro area countries disagree. (For the numbers, see here).
Earlier in July, the European Stability Mechanism had approved a new cash injection (FT). This followed a dodgy compromise in June, as reported by Jim Brunsden in the FT:
Euro area ministers and the International Monetary Fund

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Gerzensee (The Lake)

4 days ago

In the Berner Zeitung, Johannes Reichen reports about planned maintenance work on Lake Gerzensee’s overflow. The Study Center (which owns the lake located on the territory of three communities) is portrayed as an institution that could have given more money …
Interested parties are welcome to inquire if they wish to know more.

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The Reformation, Education, and Secularization

5 days ago

In a paper, Davide Cantoni, Jeremiah Dittmar, and Noam Yuchtman argue that the Protestant reformation after the year 1517 triggered major reallocation, due to religious competition and political economy.

[T]he Reformation produced rapid economic secularization. … shift in investments in human and fixed capital away from the religious sector. Large numbers of monasteries were expropriated … particularly in Protestant regions. This transfer of resources shifted the demand for labor between religious and secular sectors: graduates from Protestant universities increasingly entered secular occupations. … students at Protestant universities shifted from the study of theology toward secular degrees. The appropriation of resources by secular rulers is also reflected in construction: …

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The Black Death and Atmospheric Lead Concentration

5 days ago

During the black death epidemic (1349–1353), atmospheric lead concentration collapsed as mining ceased. This is the result of a study by Alexander More, Nicole Spaulding, Pascal Bohleber, Michael Handley, Helene Hoffman, Elena Korotkikh, Andrei Kurbatov, Christopher Loveluck, Sharon Sneed, Michael McCormick, and Paul A. Mayevski on lead levels in an Alpine glacier. They write that
[c]ontrary to widespread assumptions, … resolution analyses of an Alpine glacier reveal that true historical minimum natural levels of lead in the atmosphere occurred only once in the last ~2000 years. During the Black Death pandemic, demographic and economic collapse interrupted metal production and atmospheric lead dropped to undetectable levels.

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Trust and Money

12 days ago

In the Trustlines Network
every user is acting as a bank by granting credit lines to friends they trust. This allows to issue people powered money between friends and facilitate secure payments between strangers, by sending payments along a chain of trusting friends.
Think of IOUs or cheques and netting in the blockchain.

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Connecting Central Bank Payments Systems

12 days ago

In the FT, Martin Arnold reports about a new cross-border payment method tested by the Bank of England. The “interledger” program transfers money “near-instantaneously and without settlement risk.” The Bank of England
set up two simulated RTGS systems on a cloud computing platform, using the Ripple interledger to simultaneously process “a successful cross-border payment”.
This is not necessarily good news for the blockchain community. The Bank of England’s proof of concept is
“about connectivity between central bank systems rather than replacing the central bank systems with the blockchain,” [according to] Daniel Aranda, head of Europe at Ripple.

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A Right to Electronic Central Bank Money?

12 days ago

On his blog, Tony Yates raises the question whether the general public has a right to use central bank issued electronic money? Because of inclusion considerations? Or because providing cash and reserves is a central government function?

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Arguments Against Strict Monetary Policy Rules

12 days ago

In its July 2017 Monetary Policy Report, the Board of Governors of the Federal Reserve System discusses monetary policy rules. On pp. 36–38, the Board argues that
[t]he small number of variables involved in policy rules makes them easy to use. However, the U.S. economy is highly complex, and these rules, by their very nature, do not capture that complexity. …
Another issue related to the implementation of rules involves the measurement of the variables that drive the prescriptions generated by the rules. For example, there are many measures of inflation, and they do not always move together or by the same amount. …
In addition, both the level of the neutral real interest rate in the longer run and the level of the unemployment rate that is sustainable in the longer run are difficult to

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“Monetary Economic Issues Today,” Panel, 2017

21 days ago

Panel discussion with Ernst Baltensperger, Otmar Issing, Fritz Zurbrügg and Mark Dittli (moderator) on the occasion of the publication of the Festschrift in honour of Ernst Baltensperger, Bern, June 16, 2017. SNB press release. Video (SNB Forschungs-TV).

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Financial Intermediation and Standardization

25 days ago

On his blog, John Kay speculates about the future of financial intermediation:
The paradox of modern capital markets is that although there is less and less need for market activity from the point of view of either the end users of finance, or the investors who are the ultimate beneficiaries of finance, the volume of market activity has increased exponentially. …
The growth of secondary market trading at the expense of an understanding of the underlying exposure led to disaster in the global financial crisis of 2008, just as it had earlier led to disaster at Lloyd’s. …
Standardisation is not an answer to the problem of information provision in financial markets, nor is pervasive information asymmetry successfully resolved by insistence on the provision of detailed financial information

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On Cheques

26 days ago

On his blog, JP Koning discusses the versatility of cheques:
A cheque instructs a bank to transfer deposits.
It is a derivative on bank deposits.
A post dated cheque serves as debt instrument, e.g., vis-a-vis pay day lenders.
An uncashed cheque may serve as money if marked “to bearer” or endorsed by the recipient. Laws grant cheques currency status.
A cheque may be used for payments even if other payment mechanisms break down. During the Irish banking strike of 1970, “for six months post-dated cheques circulated as the main form of money.”
A cheque can be used by the unbanked.
This combination of negotiability, robustness, openness, and decentralization means that long before bitcoin and the cryptocoin revolution, we already had a decentralized payments system that allowed pretty much

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Currency Status

26 days ago

On his blog (here and here), JP Koning discusses currency status:
… laws that … grant … currency status. … Say that person A is carrying some sort of financial instrument in their pocket and it is stolen. The thief uses it to buy something from person B, who accepts it without knowing it to be stolen property. If the financial instrument has not been granted currency status by the law, then person B will be liable to give it back to person A. If, however, the instrument is currency, then even if the police are able to locate the stolen instrument in person B’s possession, person B does not have to give up the stolen [instrument] to person A. We call these special instruments negotiable instruments.

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Border Adjustment Tax

June 21, 2017

On VoxEU, Mary Amiti, Emmanuel Farhi, Gita Gopinath, and Oleg Itskhoki discuss a border adjustment tax and its consequences.
… a border adjustment tax … would make export sales deductible from the corporate tax base, while expenditure on imported goods would not be deductible … Therefore, if the border adjustment extends to all imports and exports, it is akin to a combination of a uniform import tariff and an export subsidy on all international trade …
… it would limit the incentives for profit shifting across countries by means of transfer pricing towards lower tax jurisdictions … the border adjustment tax is a destination-based tax, linking the tax jurisdiction to the location of consumption, rather than the location of production.
Under certain circumstances … the border adjustment

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“Die Vollgeld-Initiative und eine Alternative (The Swiss Sovereign Money Initiative, and an Alternative),” SNB, 2017

June 21, 2017

In: Thomas Moser, Carlos Lenz, Marcel Savioz and Dirk Niepelt, editorial committee, Monetary Economic Issues Today, Festschrift in Honour of Ernst Baltensperger, Swiss National Bank/Orell Füssli, Zürich, June 2017. PDF of draft.
The sovereign money initiative (Vollgeldinitiative) seeks to gain greater control over the money and credit supply, to increase financial stability and to achieve a fairer distribution of seigniorage income. The initiative’s suggested approach – a ban on active money creation – is inefficient and may even prove ineffective, as it fails to address the core problems. A variant of the initiative, which would allow the public access to electronic central bank money on a voluntary basis, would offer greater benefit at lower cost.

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“Monetary Economic Issues Today,” Orell Füssli, 2017

June 21, 2017

Festschrift in Honour of Ernst Baltensperger, Swiss National Bank/Orell Füssli, Zürich, June 2017, with Thomas Moser, Carlos Lenz, and Marcel Savioz, editorial committee. Publisher’s website.

From the publisher’s website:
»Eine Welt ohne ein gut funktionierendes Zahlungssystem, ohne Geld- und andere Wertaufbewahrungsanlagen, ohne zuverlässige Recheneinheit, das wäre eine Welt mit einem viel tieferen Wohlstandsniveau,in der wir nicht mehr leben möchten.«
Ernst Baltensperger
Ursachen und Folgen der Finanzkrise sind komplex. Zentralbanken und Regulatoren sahen sich gezwungen, in vielerlei Hinsicht unbekanntes Terrain zu betreten. Die ökonomische Forschung wurde mit vielen neuen, oft grundlegenden Fragen zum Finanzsystem und zur Wirtschaftspolitik konfrontiert und ringt bis heute um

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“Sovereign Bond Prices, Haircuts, and Maturity,” IMF, 2017

June 21, 2017

IMF Working Paper 17/119, May 2017, with Tamon Asonuma and Romain Ranciere. PDF.
Rejecting a common assumption in the sovereign debt literature, we document that creditor losses (“haircuts”) during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999–2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity.

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Legal Tender

June 20, 2017

Dave Birch blogs about the concept of legal tender: a means to discharge debt.
… you cannot force a retailer to accept legal tender or indeed any other form of tender. If, however, you buy something from them and there is no contractual barrier to the use of any form of tender, and you offer legal tender in payment, and they refuse it, then they cannot enforce the debt in court. That’s what legal tender means: it’s about discharging debts. If you incur a debt you can discharge it with legal tender, but you cannot be forced to incur the debt in the first place …

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Causality: An Illusion?

June 15, 2017

The Economist reports about research on quantum mechanics and the theory of relativity which suggests that causality is a dubious concept.
… it is no longer only location in space that becomes uncertain, but also location in time. Often, therefore, it would no longer be possible to say which of two events came first.

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Monte dei Paschi Bail-X

June 13, 2017

The Economist reports about plans for Monte dei Paschi’s future:
… retail investors in the bank’s junior bonds, many of them ordinary customers. European state-aid rules say that they should lose their money along with shareholders. Technically, they will. In fact, to preserve their savings and avoid a political outcry, they will be deemed to have been “mis-sold” the bonds: they will receive shares which will in turn be swapped for new, safer bonds.
Italy has to come up with a restructuring plan, likely to involve job losses and branch closures, for the commission’s approval. (The ECB must also certify the bank’s solvency.) Bosses’ pay will be capped at ten times the staff average. And Monte dei Paschi must sell its sofferenze, the worst category of non-performing exposures, which in

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Sources of Low Real Interest Rates

June 12, 2017

In a (December 2015) Bank of England Staff Working Paper, Lukasz Rachel and Thomas Smith dissect the global decline in long-term real interest rates over the last thirty years.
A summary of their executive summary:
Market measures of long-term risk-free real interest rates have declined by around 450bps.
Absent signs of overheating this suggests that the global neutral rate fell.
Expected trend growth as well as other factors affecting desired savings and investment determine the neutral rate.
Global growth was fairly steady before the crisis but may (be expected to) fall after the financial crisis. Recently, slower labor supply (demographics) and productivity growth may account for a 100bps decline in the real rate.
Desired savings rose, due to demographics (90bps), higher within

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ECB Collateral Framework

June 10, 2017

In an ECB occasional paper, Ulrich Bindseil, Marco Corsi, Benjamin Sahel, and Ad Visser review the European Central Banks’s collateral framework.
From the executive summary, on misconceptions:
… differences e.g. with interbank repo markets: first, central banks are not subject to liquidity risk in the way “normal” market participants are, and can therefore accept less liquid collateral. Second, as the central bank has a zero default probability in its domestic market operations, collateral providers are willing to accept severe haircuts to obtain credit. …
According to the authors the ECB is the most transparent central bank when it comes to its collateral framework. But the latter is also complicated:
However, it is true that the ESCF is relatively broad in terms of the scope of

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The Swiss Phillips Curve

June 10, 2017

On VoxEU, Stefan Gerlach reviews the case for tilting Phillips curves in Switzerland.
Previous research had suggested that the Swiss Phillips curve had steepened in the second half of the 20th century. Gerlach estimates a Phillips curve model that includes lagged inflation, an output gap measure, and a measure of import price inflation. His model suggests several structural breaks:
The first structural break occurs in 1936-37. The estimated Phillips curves indicate that inflation became much more inertial, as evidenced by the fact that the parameter on lagged inflation more than doubled.
The second break occurs in 1970-71 … While the sensitivity of inflation to the output gap essentially doubles, other parameters are broadly unchanged. This impies that the Phillips curve steepened

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Orderly Liquidation Authority vs. Financial Institutions Bankruptcy Act

June 10, 2017

On the Brookings blog, Aaron Klein discusses the Orderly Liquidation Authority that was introduced with the Dodd-Frank Act.
Dodd-Frank extended the FDIC’s authority to resolve failed institutions beyond commercial banks to include the entire bank holding company and all firms designated as Systemically Important Financial Institutions (SIFIs). Thus, if a large, complex financial institution were to fail, the FDIC would have authority to resolve the entire institution, both the commercial bank and the rest of it.
The FDIC needs access to cash to operate these firms while they go through resolution.  Title II of Dodd-Frank created a new fund, the Orderly Liquidation Authority (OLA), to be funded by complex, large institutions and non-bank SIFIs. Unlike the DIF which is pre-funded, OLA is

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Government Debt with State Contingent Coupons

June 8, 2017

On VoxEU, Myrvin Anthony, Narcissa Balta, Tom Best, Sanaa Nadeem, and Eriko Togo discuss the history of government debt with state contingent coupons and offer some lessons.
In the mid-19th century, the Confederate states issued cotton-linked bonds
In the late 1970s, Mexico issued oil-linked bonds
In the 2000s, Turkey issued revenue-indexed bonds
Since 2014, Uruguay issues nominal wage-issued bonds
Some other examples (figure taken from the column):
Obviously, confidence in data quality and thus, quality of institutions is important for the success of such issues.
State contingent securities also have been used in debt restructurings:
The first use of state contingent bonds in debt restructurings occurred in the Brady deals from 1989-97, which allowed commercial banks’ claims on debtor

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Initial Coin Offerings and the Pecking Order

June 8, 2017

On Alphaville, Izabella Kaminska comments on the pecking order induced by initial coin offerings (ICOs).
All of this raises an important point about actual shareholder rights within these structures. Say a legally-incorporated institution with actual shareholders dishes out an uncapped amount of tokens promising a share of revenues or dividends via the ICO process. Do shareholders’ rights to those revenue/dividends trump rights of the token holders? And if so, how does that square with the way risk is distributed through these systems? As Unseth notes, more often than not, it’s the token holders taking the bulk of the early concept risk, yet the inferiority of their ranking relative to shareholders kind of sees the latter receiving a free lunch.

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Tax Evasion and Wealth Inequality

June 7, 2017

The Economist reports about a study by Annette Alstadsæter, Niels Johannesen and Gabriel Zucman who matched leaked information from Swiss banks and Panamanian shell companies with Scandinavian wealth records. Their findings:
Tax evasion is progressive. The average / top 1% / top 0.01% Scandinavian household paid 3% / 10% / 30% fewer taxes than it should.
Accordingly, estimates of wealth inequality (based on tax data) likely underestimate the degree of inequality.

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Governments Adopt the Blockchain, To Improve Efficiency and Build Trust

June 7, 2017

The Economist reports about government initiatives aimed at using blockchain technology in the public sector.
Possible uses include land registries, identity-management systems, health-care records, or elections.
Proponents expect the technology to improve efficiency and transparency and foster trust.
Adoption requires significant investments.
According to a survey “nine in ten government organisations say they plan to invest in blockchain technology to help manage financial transactions, assets, contracts and regulatory compliance by next year.”
Sweden tests a blockchain-based land registry; Dubai’s government wants to completely shift to blockchain technology by 2020; Estonia stores health records and protects its shared government systems using blockchain-like technolog; Georgia’s

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