SMP: The Problem with Stable Coins

To illustrate the problem, Eichengreen offers three scenarios. In the first scenario, a cryptocurrency issuer maintains 100 percent dollar backing for coins in circulation. This is similar to how a currency board works. Since such an arrangement requires the issuer attract and hold dollars in order to expand the supply of coins, the cryptocurrency will not be subject to a speculative attack. However, this also means the issuer cannot invest those dollars since it must hold all of them to back the cryptocurrency.

Price volatility is a big problem in the crypto world. Widespread adoption is unlikely without a good monetary rule that reduces volatility. But, as Barry Eichengreen notes in a recent Project Syndicate article, stable coins like Tether, Sagacoin, and Basis have their own issues.

Unable to earn interest on the float, a cryptocurrency issuer would find it challenging to profit while holding 100 percent dollar reserves. It would also struggle to offer a competitive return and, hence, attract customers. Why would one exchange a widely used dollar for an illiquid cryptocurrency, which is harder to use and does not offer a competitive interest rate?

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AIER:Elastic Cryptocurrency Supplies: A Step in the Right Direction

A major shortcoming of bitcoin and most other cryptocurrencies is the way in which their supplies are governed. With a perfectly inelastic supply over the relevant time horizon, a change in demand is entirely reflected by a change in the cryptocurrency’s price. Since demand shocks are relatively common, this means that cryptocurrencies are subject to high price volatility.

Volatility can be a desirable feature for a financial investment that tries to capture capital gains. But it is a major impediment to cryptocurrencies becoming more widely accepted as a medium of exchange. Hence, the observation that bitcoin and other cryptocurrencies have become financial assets does not mean they are necessarily on the path to becoming new monies.

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SMP: Gunther Schnabl on Exit Strategies from Unconventional Monetary Policy

In a recent paper, Gunther Schnabl discusses the environment that ultra-low interest rates have produced and the challenges of exiting such an environment. Schnabl brings up a number of interesting issues, including how low interest rate policies keep zombie banks alive and distort labor markets. The policies come at the expense of investment in capital goods and research and development, which fuels growth in rich countries.

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SMP: The Over-Codification of Financial Regulation

Thomas M. Hoenig, vice chairman of the Federal Deposit Insurance Corporation from November 30, 2012 to April 30, 2018, recently participated in an interesting discussion at Metropolitan State University–Denver.

I was pleasantly surprised to hear Hoenig’s concerns about one way to approach financial regulation. Financial regulation is approached as a very long and detailed list of “if … then …” propositions. These propositions are intended to cover all potential scenarios and contingencies.

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SMP: Not All Crisis are Due to Unexpected Shocks

Only a few weeks ago, a number of emerging economies suffered currency crises. Argentina stands as an outstanding case that was covered in several media outlets. For instance, in a recent piece at Project Syndicate, Martin Guzman and Joseph Stiglitz argue that the crisis there was a surprise.

In economics, in particular in the study of business cycles, the claim of unexpected shocks has become almost an excuse to defend any policy carried out by government institutions. These unexpected events, sometimes referred to as black swans, by their nature cannot be predicted. Therefore there is nothing a government entity such as a central bank could have done to avoid the costly shock. Crises are not the result of bad policies, they are just a matter of bad luck. Good luck is to have policy makers in place to minimize the damage from these unexpected shocks.

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SMP: Economists are not like doctors

In a recent paper, Ricardo Reis offers an interesting insight in the debate on dynamic stochastic general equilibrium that has taken place in macroeconomics since the 2008 financial crisis. While some economists argue that DSGE modeling is fundamentally flawed, others maintain that because the crisis was unexpected, it is inappropriate to blame such modeling.

Reis admits that DSGE modeling is not perfect and that there is certainly room for improvement. However, he argues, macroeconomics is much more than DSGE modeling. Even if critiques of DSGE modeling are correct, those critiques do not extend to macroeconomics as a field. Reis pushes further the defense of macroeconomics by arguing that it is not the job of macroeconomists to predict crises.

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SMP: Cryptocurrencies and the Denationalisation of Money

In Denationalisation of Money (1976), Hayek put forward the idea of currency competition. The money supply should be determined through a competitive market process rather than by experts in charge of central banks. Hayek’s proposal would have private banks issue their own fiat currencies, competing to provide the currency with the most stable purchasing power. This, Hayek argued, would provide a more stable money supply than experts at central banks can.

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SMP: Lessons From Inflation-targeting Regimes

Inflation targeting is probably the most widely-known policy adopted by central banks around the world. Under an inflation-targeting regime, the government (usually the central bank or treasury) announces an inflation target (usually with lower and upper limits). It is then up to the central bank to decide how to achieve the target. Seen in this light, inflation targeting is more of a constrained discretionary policy than a strict monetary rule.

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SMP: It’s Not a Comeback – It’s an Opportunity

In a recent post, Scott Burns discusses a paper I am working on with Roger Koppl (Syracuse University). The tentative title of our paper is “Is Macroeconomics Taking an Austrian Turn?”

The transformation (macroeconomics turning to Austrian ideas), Burns argues, “is by no means revolutionary, and it is far from complete.” Most certainly. But our paper is not about an outcome that already happened. Rather, it is about an opportunity still open for scholars interested in Austrian ideas. After all, our paper comes in the form of an open question, not a settled statement.

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SMP: The Macro Bifurcation

Política monetaria y teoría macroeconomica parecen haber tomado caminos distintos luego de la crisis del 2008. Breve comentario en Sound Money Project.

One of the major issues in contemporary macroeconomics concerns monetary policy since the 2008 crisis. For many, if not most, of the major central banks, the conventional channels through which the money supply changes do not work anymore. For instance, by paying interest on reserves, the Federal Reserve has moved from adjusting the money supply to influencing the banks’ money demand. Some central banks have even maintained that money supply does not affect inflation anymore.

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