Tuesday, May 29, 2018

Michael Kumhof and Clare Noone — Central bank digital currencies - design principles and balance sheet implications

This paper sets out three models of central bank digital currency (CBDC) that differ in the sectors that have access to CBDC. It studies sectoral balance sheet dynamics at the point of an initial CBDC introduction, and of an attempted large-scale run out of bank deposits into CBDC. We find that if the introduction of CBDC follows a set of core principles, bank funding is not necessarily reduced, credit and liquidity provision to the private sector need not contract, and the risk of a system-wide run from bank deposits to CBDC is addressed. The core principles are: (i) CBDC pays an adjustable interest rate. (ii) CBDC and reserves are distinct, and not convertible into each other. (iii) No guaranteed, on-demand convertibility of bank deposits into CBDC at commercial banks (and therefore by implication at the central bank). (iv) The central bank issues CBDC only against eligible securities (principally government securities). The final two principles imply that households and firms can freely trade bank deposits against CBDC in a private market, and that the private market can freely obtain additional CBDC from the central bank, at the posted CBDC interest rate and against eligible securities.
Bank of England
Central bank digital currencies - design principles and balance sheet implications
Michael Kumhof and Clare Noone

See also
Understanding the changing role of central banks and the novel policies they have pursued recently is absolutely essential for analysing many economic, financial and political issues, ranging from financial regulation and crisis, to exchange rate dynamics and regime changes, and QE and prolonged low interest rates. This book features contributions by many of the world’s leading experts on central banking, providing in accessible essays a fascinating review of today’s key policy and research issues for central banks. Luminaries including Stephen Cecchetti, Takatoshi Ito, Anil Kashyap, Mervyn King, Donald Kohn, Otmar Issing, Hyun Shin and William White are joined by Charles Goodhart of the London School of Economics, whose many achievements in the field of central banking are honoured as the inspiration for this book.
The Changing Fortunes of Central Banking discusses the developing role of central banks and the policies they pursue in seeking monetary and financial stabilisation, while also giving suggestions for model strategies. This comprehensive review will appeal to central bankers, financial supervisors, academics and economists working in think tanks.
Bruegel
The changing fortunes of central banking
Philipp Hartmann, European Central Bank & CEPR; Haizhou Huang, China International Capital Corporation and Dirk Schoenmaker, Erasmus University, Bruegel & CEPR

2 comments:

Andrew Anderson said...

The core principles are: (i) CBDC pays an adjustable interest rate.

I.e., welfare proportional to account balance = ETHICAL FAIL.

(ii) CBDC and reserves are distinct, and not convertible into each other.

Violates equal protection under the law = ETHICAL FAIL.

(iii) No guaranteed, on-demand convertibility of bank deposits into CBDC at commercial banks (and therefore by implication at the central bank).

So bank liabilities for fiat are a fraud if the fiat is in the form of CBDC?!

(iv) The central bank issues CBDC only against eligible securities (principally government securities).

ALL central bank fiat creation should be for the monetary sovereign ONLY for the general welfare or in the form of equal fiat distributions to all citizens.

Andrew Anderson said...

Wow! Central Banks are so dedicated to maintaining the ability of banks to steal via government privilege.

Then this warning:

and they did not repent of their murders nor of their sorceries nor of their immorality nor of their thefts. Revelation 9:21 New American Standard Bible (NASB)

I suggest that Central Banks get started on their repentance since they might not be able to so in the future.