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Reserves for everyone – towards a new monetary regime?

Niepelt, D. (2015) “Reserves for everyone – towards a new monetary regime?“, VoxEU Organisation, 21 Ιανουαρίου.

 

Recent experience with the zero lower bound on nominal interest rates, and the use of high-denomination notes by criminals and tax evaders, have led to revived proposals to phase out cash. This column argues that abolishing cash may be neither necessary nor sufficient to overcome the zero lower bound problem, and would severely undermine privacy. Allowing the public to hold reserves at central banks could reduce the need for deposit insurance, although the transition to the new regime and the effects on credit supply must be carefully considered.

Kenneth Rogoff (2014a, b, c) has proposed phasing out cash – at least large-denomination notes in developed economies. The goal would be to:

  • Eliminate the zero lower bound on nominal interest rates that may interfere with monetary policy; and
  • Eliminate anonymous transaction that may obstruct the fight against crime, money laundering, tax evasion, and the like.

His intervention is set to revive an old debate about the role of cash that lately resurfaced in the blogosphere. Different contributions to this debate may be represented in terms of a two-step approach to monetary regime change:

  • First, to grant the general public access to central bank reserves; and
  • Second, to phase out cash.

 

Yes on one, No on two

I argue that the first step – and only the first – should seriously be considered.

Letting the general public hold reserves at the central bank and use them for electronic payments would lower the risk of bank runs and strengthen financial stability. Since deposits held at the central bank are base money – in contrast to deposits at commercial banks, which merely constitute claims on base money – they are run-proof. As a byproduct, public ‘insurance’ of bank deposits could be scaled down and the moral hazard risks it entails could be limited.

 

 

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