My VoxEU column now also on finews and World News Monitor, September 17, 2019.
Digital currencies involve tradeoffs. Libra resolves them less favorably than other projects, and less favorably than CBDC.
When confronted with the choice between the status quo and a new financial architecture with CBDC, most central banks have responded cautiously. But Libra or its next best replica will take this choice off the table – the status quo ceases to be an option. The new choice for monetary authorities and regulators will be one between central bank managed CBDC on the one hand and – riskier – private digital tokens on the other. Central banks have a strong interest to maintain control over the payment system as well as the financial sector more broadly and to defend the attractiveness of

On swissinfo.ch, Fabio Canetg explains how the Swiss National Bank prevents banks from hoarding cash rather than holding reserves at the central bank (which pay negative interest). He points to the following sentence in the SNB’s December 2014 press release (my emphasis) and he speculates that banks could, in principle, implement similar schemes to keep depositors from withdrawing cash:
The threshold currently corresponds to 20 times the minimum reserve requirement for the reporting period 20 October 2014 to 19 November 2014 (static component), minus any increase/plus any decrease in the amount of cash held (dynamic component). The change in the amount of cash held is calculated as the difference between the average cash holdings during the most recent reporting period for which the

This is blog post #1000.

VoxEU, September 12, 2019. HTML.
Digital currencies involve tradeoffs. Libra resolves them less favorably than other projects, and less favorably than CBDC.
When confronted with the choice between the status quo and a new financial architecture with CBDC, most central banks have responded cautiously. But Libra or its next best replica will take this choice off the table – the status quo ceases to be an option. The new choice for monetary authorities and regulators will be one between central bank managed CBDC on the one hand and – riskier – private digital tokens on the other. Central banks have a strong interest to maintain control over the payment system as well as the financial sector more broadly and to defend the attractiveness of their home currency. Nolens volens, they will

Journal of Monetary Economics, with Markus Brunnermeier. PDF.
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.

MA course at the University of Bern.
Time: Wed 10-12. KSL course site. Course assistant: Christian Wipf.
The course introduces Master students to modern macroeconomic theory. Building on the analysis of the consumption-saving tradeoff and on concepts from general equilibrium theory, the course covers workhorse general equilibrium models of modern macroeconomics, including the representative agent framework, the overlapping generations model, and possibly the Lucas tree model. Lectures follow chapters 1–4 (possibly 5) in these notes.

Huw van Steenis’ summarizes his report as follows (my emphasis):
A new economy is emerging driven by changes in technology, demographics and the environment. The UK is also undergoing several major transitions that finance has to respond to.
What this means for finance
Finance is likely to undergo intense change over the coming decade. The shift to digitally-enabled services and firms is already profound and appears to be accelerating. The shift from banks to market-based finance is likely to grow further. Ultra low rates, new regulations and the need to invest in updating their businesses mean many UK and global banks are struggling to make their cost of capital. Brexit and political and policy changes around the world will also impact the shape of financial services. Risks are likely

The Federal Reserve Banks will develop a round-the-clock real-time payment and settlement service, FedNow. The objective is to support faster payments in the United States.
From the FAQs (my emphasis):
… there are some faster payment services offered by banks and fintech companies in the United States, their functionality can be limited. In particular, due to the lack of a universal infrastructure to conduct faster payments, most of these services rely on “closed-loop” approaches, meaning that users signed up to one service cannot exchange payments with users signed up to other services. Other services target ubiquity by relying on users’ bank accounts, but they may face challenges reaching enough banks to allow any two users to exchange payments. Moreover, these services typically use

In his Nobel lecture (reprinted in the June issue of the American Economic Review), William Nordhaus concludes that we should focus on four goals:
First, people around the world need to understand and accept … Those who understand the issue must speak up and debate contrarians who spread false and tendentious reasoning. …
Second, nations must establish policies that raise the price of CO2 and other greenhouse-gas emissions. …
Moreover, we need to ensure that actions are global and not just national or local. … The best hope for effective coordination is a climate club, which is a coalition of nations that commit to strong steps to reduce emissions along with mechanisms to penalize countries who do not participate. …
Finally, … [d]eveloping economical low-carbon technologies will lower

Different aspects of the Libra proposal that various authors have emphasized:
Jameson Lopp on OneZero: A “database of programmable resources;” Move; “[p]erhaps the network as a whole can switch to proof of stake, but in order for the stablecoin peg/basket to be maintained, some set of entities must keep a bridge open to the traditional financial system. This will be a persistent point of centralized control via the Libra Association”; not a blockchain, the “data structure of the ledger history is a set of signed ledger states”; initially, 1,000 payment transactions per second with a 10-second finality time; technical aspects.
Laura Noonan and Nicholas Megaw in the FT: Gaining regulatory approval (in each US state, as well as in many countries) is burdensome even if Carney signals “open

In 12 Rules for Life, Jordan Peterson argues for the kind of values instilled by a socially conservative parental home: Aim for paradise, but concentrate on today. Meaning is key, not happiness. Assume responsibility. Listen carefully, speak clearly, and tell the truth. And stand straight, even in the face of adversity.
Here they are, Peterson’s 12 rules:
Stand up straight with your shoulders back
Treat yourself like you would someone you are responsible for helping
Make friends with people who want the best for you
Compare yourself with who you were yesterday, not with who someone else is today
Do not let your children do anything that makes you dislike them
Set your house in perfect order before you criticise the world
Pursue what is meaningful (not what is expedient)
Tell the truth

In an NBER working paper, James Stock and Mark Watson argue that the correlation between cyclically sensitive inflation (CSI) and bandpass filtered activity measures is high and has not declined over the last decades, contrary to standard measures of the slope of the Phillips curve.

… we construct a new price index designed to maximize the cyclical variation in the price index. This index, which we call Cyclically Sensitive Inflation (CSI), estimates the weights on the component prices to maximize the correlation of the CSI with our bandpass measure of aggregate cyclical variation. … this index places low weights on tradeable goods, such as energy, motor vehicles & parts, and durable household equipment. The index also places low weight on the least well-measured sectors, such as

NZZ, 10 July 2019, with Corinne Zellweger-Gutknecht. PDF.
Libra is supposed to be backed; the returns on the securities backing it are going to be distributed among the Libra partners; and Libra’s price is supposed to be managed by a network of market makers. We don’t know much more. Will market makers have the incentive to deliver?
See also the longer article in Jusletter.

Mit digitalem Zentralbankgeld als Reaktion auf die aktuellen Umbrüche im Finanzsystem würde die Zentralbank zum Intermediär. Das böte neuen geldpolitischen Spielraum.
Das Finanzsystem ist im Umbruch. Fintech-Startups
erfinden Finanzdienstleistungen neu und zwingen Banken zur Anpassung ihrer
Geschäftsmodelle. Grosse Internet-Plattformen erweitern ihre Netzwerke zu
Zahlungsverkehrssystemen und nutzen gesammelte Kundendaten für
Finanzdienstleistungen. Parallel dazu entstehen im Privatsektor neue Formen von
Geld. Nächstes Jahr will Facebook seinen Nutzern bieten, was in China schon
gang und gäbe ist: Die Kommunikations-, Einkaufs- und Bezahlumgebung aus einer
Hand.
Viele Zentralbanken erwägen vor diesem Hintergrund die
Herausgabe eigener neuer Zahlungsmittel – "Central Bank Digital

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.

In an interview with the NZZ, Gabriel Felbermayr explains where the European Union adds value, and where it doesn’t. The key points:
Free trade for goods and services as well as capital and labor mobility are partial substitutes. Partial, because factor mobility fosters trade and technology transfer.
Estimates suggest that free trade and capital mobility generate more than 80% of the welfare gains from European integration.
Even labor mobility does not require admission into welfare systems. “… der Nutzen uniformer Regeln im Güter-, Dienstleistungs- und Kapitalbereich [ist] sehr hoch … Dies stimmt indes nicht für das Sozial-, Arbeits- und Steuerrecht, auch innerhalb der EU. … Politisch will die EU die Harmonisierung im Arbeits- und Sozialbereich möglichst ausdehnen, um den Wettbewerb

In the FT, Jean-Pierre Landau argues that central banks should introduce central bank digital currency:
A CBDC would protect the pre-eminence of public money in a digitalised economy. It would maintain effective convertibility of private into public money and provide a defence against digital dollarisation.
For that purpose, a CBDC should be as close as possible to cash. It should be a complement, not a substitute, to bank deposits. It should not carry interest. Whether it should be anonymous, as cash currently is in certain limits, is a fundamental social choice. It must be openly debated as the digitalisation of money forces us to reconsider and rethink the place of privacy in our lives.

Jusletter, 1 July 2019, with Corinne Zellweger-Gutknecht. PDF.
Libra is supposed to be backed; the returns on the securities backing it are going to be distributed among the Libra partners; and Libra’s price is supposed to be managed by a network of market makers. We don’t know much more. Will market makers have the incentive to deliver?

Finanz und Wirtschaft, June 29, 2019. PDF.

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.

In the FT, Chris Giles, Caroline Binham, and Delphine Strauss report about plans of the Bank of England to let fintech companies
bank at Threadneedle Street and thereby offer payments systems on a level playing field with commercial banks.
The editorial board of the FT welcomes the plans; it seems to have in mind not only competition but also “synthetic” CBDC:
By offering fintech companies access to the BoE’s vaults, the governor may inject much-needed competition into the sector. What must follow is proactive regulation …
Commercial banks have traditionally had exclusive access to deposits at the UK’s central bank, offering them a competitive advantage through cheap banking services. … Another potential advantage for consumers is they could be paid the central bank’s often favourable

The Study Center’s hotel has been awarded the Swiss Location Award for the number one seminar location in Switzerland.

In the FT, Hannah Murphy reports about Facebook’s launch of Libra.
Lots of skepticism in the comments section.
And Hannah Murphy reports that
[p]ositive Money, a consumer campaign group, attacked the proposal. “Our money is increasingly in the hands of a small number of banks and payment companies, and we should avoid ceding further control to unaccountable corporate interests. Facebook’s plans pose alarming implications for privacy and power in the economy,” said David Clarke, the head of policy at the group.

At the conference of “Positiva Pengar” and “Monetative” in Stockholm, I argued that it is not so much the introduction of CBDC which would make a difference, but the policies accompanying such an introduction. This view is backed by research of Markus Brunnermeier and myself, as well as by myself.
Many of the proponents of the sovereign money movement appeared open to the argument. Some of the followers, however, did not; they associate CBDC with many benefits that money, in whatever form, will not be able to deliver.

CEPR Discussion Paper 13778, June 2019, with Markus Brunnermeier. PDF. (Local copy of NBER wp.)
We develop a generic model of money and liquidity that identifies sources of liquidity bubbles and seignorage rents. We provide sufficient conditions under which a swap of monies leaves the equilibrium allocation and price system unchanged. We apply the equivalence result to the “Chicago Plan,” cryptocurrencies, the Indian de-monetization experiment, and Central Bank Digital Currency (CBDC). In particular, we show why CBDC need not undermine financial stability.

Central Banking reports about the new working paper by Markus Brunnermeier and myself.

In the New York Times, John Henderson reports about a new hiking trail in Liechtenstein that was opened to mark the country’s 300-year anniversary.
This Cross-Country Hike Took 5 Days. That’s Going the Long Way.
According to Lonely Planet, the trail makes Liechtenstein one of the top European travel destinations in 2019.

NBER Working Paper 25877, May 2019, with Markus Brunnermeier. PDF. (Local copy.)
We develop a generic model of money and liquidity that identifies sources of liquidity bubbles and seignorage rents. We provide sufficient conditions under which a swap of monies leaves the equilibrium allocation and price system unchanged. We apply the equivalence result to the “Chicago Plan,” cryptocurrencies, the Indian de-monetization experiment, and Central Bank Digital Currency (CBDC). In particular, we show why CBDC need not undermine financial stability.

In the NZZ, Thomas Hürlimann reviews his experience as a patient in Swiss and German hospitals. Top: Stans, Prof. Dr. Bachmann. Flop: Baar, Berlin Friedrichshain.

In the NZZ, Thomas Hürlimann reviews his experience as a patient in Swiss and German hospitals. Top: Stans, Prof. Dr. Bachmann. Flop: Baar, Berlin Friedrichshain.

In a CEP Discussion Note, Pierre Monnin argues that financial markets mis-price climate related credit risk. If this were corrected some securities held by the ECB would loose their investment grade credit rating.
Assessing climate risks requires methodologies based on forward-looking scenarios, on complex cause-and-effect linkages and on data that has not been observed in the past. Such models are at their infancy, but already offer meaningful insights. This note provides an overview of key components that such models are built on and illustrates them with examples of the analytics that are already available. It also applies one of the available methodologies to assess transition risk to the corporate bond holdings of the European Central Bank.