Andy Haldane and BOEcoin

The 1995 British two pound "Dove" coin
The 1995 British two pound "Dove" coin

Moneyness - Chief economist at Bank of England's Andrew Haldane • The central bank recently called for a more imaginative way how to deal with the zero lower bound constraint think interest rates brought about by technology. Haldane said lower bound is not a passing problem. Instead, a growing number of probability, when policy makers need clearance three percentage points, in order to mitigate the effects of a typical recession, the clearance would not be there.

Haldane translate higher inflation target, and further quantitative easing to relax constraints, preferring to focus on the negative interest bill, which will often discussed on this blog topic. He referred to the classic Silvio Gesell stamp duty (which I discussed here), go all out ban advocated cash Ken Rogoff and Miles Kimball of the crawling peg exchange rate (see here).

According to Haldane, and Gesell taxes, Rogoff ban (PDF) problem, Kimball pegged, all these faces significant "binding behavior." The use of paper money because the account and medium of exchange units social customs, and both agreed to only transfer huge costs. Tony Yates joined, pointed out the difficulties Gesell choice. Instead, Haldane floats have government support cryptocurrency, or our blog have been calling Fedcoin (in this case BOEcoin) the possibility of replacement of banknotes. Unlike cash, it will be very easy to implement negative interest rates on Fedcoin or BOEcoin users, thus relaxing the lower limit constraints. Conventions remain unchanged; people can still use the currency as a government-supported exchange and unit pricing internet. *

Although I like to define the problem Haldane, his general approach to solve it the way, I'm not a fan of his chosen solution. As Robert Sams has pointed out, Fedcoin / BoEcoin can be so good, it ended up outcompeting personal bank deposits, so that our traditional banking model halted. JKH frequent commentator called Chicago plan # 37, cited reform of the Great Depression (because of the recovery), which would prohibit fractional reserve banking. If the lower limit of Haldane uncomfortable with Gesell / Rogoff / Kimball option slowdown, because they have agreed to interference, he should be worried about BOEcoin lot.


However, I do not agree with Haldane's view that by relaxing the constraint of equipment should not interfere with the practice as little as possible. We want the cheapest policy; streets only slightly hampered typical British everyday life while ensuring that a sufficient amount of slack in the British bank.

With this in mind, this is my opinion is the cheapest way for the Bank of England to relax the lower bound: £ 50 just to freeze the number of bills in circulation. Yes, it is that simple. There are currently 236 million £ 50 pounds circulation. Do not print any more people, Victoria Klein blue. **

I put this embargo policy of maximum attention. How does it work? ***

He said that in the next crisis, the Bank of England decided to cut interest rates from 0.5% to -2.0%. Faced with profound negative interest rates, the United Kingdom run smack dab into the lower bound for the British group tried to flee the bill. After all, the bill provides a safe return of 0%, at £ 50 note because these chosen escape route is the least expensive storage and transfer.

Full withdrawal application, the bank will soon run out of £ 50's. At this point, the bank will usually turn to the Bank of England to supplement their stash to fill customer demand. But with the number of the Bank of England has frozen £ 50 to 236 million years old, and not print any new banks offer only low denomination banknotes to clients. However, this will immediately slow down cash to run, because more than 20 years of £, £ 10 seconds, 5 seconds, and £ much more expensive storage, and transfer of the ship's more than £ 50. Although people will love the sleek high denomination note to deposit, pay 2%, they will be relatively indifferent when the choice is a huge low-denomination cash and deposits, pay between 2%. Therefore, the lower bound is already at the maximum attention by the embargo has been successfully softened.

Once the negative interest rate has reached its objectives and the crisis has been greatly reduced, they can increase back above 0%, the central bank can thaw the number of £ 50's. Everything is back to normal.

Some conventions will change when the maximum value of notes embargo.

1. People will no longer be able to convert the value of the deposit £ 50 to £ 50 note. Instead, they will have to meet to obtain two 20s and £ 10 £ This does not seem like the agreement to abandon expensive. If people really want to get their hands on £ 50 years, they can still be a small premium in the secondary market to buy them, though.

2. Under normal circumstances, £ 50 pounds total trading at par. Because their quantity will be fixed according to the plan, £ 50's rise to changes in the value of the premium above par, as long as interest rates fall significantly below zero. For example, the 2.0% rate £ 50 note may be £ 51 or £ 52 market.

£ 50 denomination bank notes are an inexpensive convention overturned. Most UK residents may not run £ 50 years anyway. Those who do use the £ 50 pounds will have habits in their daily lives to monitor their market price, so that they can correct the trading price. But in the face of the very few at the inconvenience is a small cost for the community to pay for slack lower bound.

3. It is important, there will be no need for the promulgation of £ 50's embargo proclaimed account switching means; switch will be seamless.

Because of £ 50 No never an important part of the day-to-day commercial and retail presence to negative interest rates no retailers will set its price at 50 £ terms of standards. If they choose to set the price tag of £ 50 note, they will find that if they want to maintain their profits, they will be charged a small fee of £ 20-year-old, £ 10 seconds and £ 5 seconds, every time someone paid bank deposits. Given the prevalence of these payment methods, which means that surcharging almost every single transaction. This is very inconvenient. For retailers setting price sticker dominant payment medium - £ 20 seconds and 10 seconds deposit and 5S £ £ and banks, and to provide a small discount to be better with the rare customer's to pay £ 50.

It is entirely possible that most retailers will not disturb any of the £ 50's provide any discounts. This will effectively underestimate £ 50 note. Gresham's Law tells us that for this to be underestimated, 50 will disappear from circulation in £, because it was hoarding in people's mattress. For regular British citizen, he has never been seen in circulation £ 50 years probably will not change much. Who does not want a £ 50 can simply advertise Craig's list as a whole, providing a high enough premium to draw out people's hoarding.

Finally, a few caveats. I am using this job number is the pitch. It may be frozen £ 50 bill supply policy so that the Bank of England to get to -2%. But perhaps it is only allowed to be -1.75% level, it may be too much slack constraints while allowing the tax rate to 2.5%.

Haldane noted that the Bank of England may need margin was 3%, in order to combat the next recession. But with Tony Yates pointed out that in computing, you need a tax rate of 8% of 2008 bank officials. Banks can be present as part of the way, not only the embargo of the £ 50 个, and the next highest value note; the £ 20 However, this may not be enough. Due to the smaller number of notes they freeze, which began to break into people's lives on the street, make policy more expensive. If the lower limit of the need to relax in order to allow for 8% of the price, I think the Bank of England should be prepared as Miles Kimball's crawling peg a stronger policy. After all, when a crisis so profound negative rate needs sorting hits, the last thing we should be worried about is some of the conventions disturbing. Until 2008 another style crisis hit, the larger value Description of the embargo may be the least intrusive, lowest cost option.

* These policies, I think Miles Kimball's plan is by far the best one.
** In particular, the bank will only print a new bill to replace the torn / worn fees. Otherwise, the outstanding issues will be wear and easier to forge. As for Scotland, which issues notes one hundred pounds, an amount must be fixed as well.
*** I first mentioned the large bill embargo with respect to the idea of ​​Switzerland Swiss franc banknotes of 1000, later elaborated on its lazy central bankers in the guidelines to get rid of a liquidity trap.

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