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Fri, Dec 21 2012 12:21:26

How Electronic Money Can Eliminate Inflation

  1. mileskimball
    Miles Kimball@mileskimball
    Q: @Kflohe asks how electronic money can eliminate inflation. A: W or w/o depreciating currency, e-money eliminates the zero lower bound...
    Fri, Dec 21 2012 11:40:23
  2. mileskimball
    Miles Kimball@mileskimball
    The main reason many central banks (Fed, ECB ...) have a long-run inflation target of 2% instead of 0 is b/c they're worried about the ZLB.
    Fri, Dec 21 2012 11:42:04
  3. mileskimball
    Miles Kimball@mileskimball
    So if the zero lower bound is eliminated by electronic money, I predict central banks will choose a long-run inflation target of zero.
    Fri, Dec 21 2012 11:42:53
  4. mileskimball
    Miles Kimball@mileskimball
    With electronic money (think reserves, bank accounts, ...) as the unit of account, depreciating paper currency makes the ZLB non-binding.
    Fri, Dec 21 2012 11:44:29
  5. mileskimball
    Miles Kimball@mileskimball
    Having the same central bank with authority to issue both e-money and currency means the exchange rate between them is fully defensible.
    Fri, Dec 21 2012 11:46:12
  6. mileskimball
    Miles Kimball@mileskimball
    So a central bank with the needed legal authority can announce a track for the exchange rate between e-money and paper money.
    Fri, Dec 21 2012 11:46:55
  7. mileskimball
    Miles Kimball@mileskimball
    Announcing a track for the e-money/paper money exchange rate that has paper money depreciating gives paper money a rate of return below zero
    Fri, Dec 21 2012 11:47:59
  8. mileskimball
    Miles Kimball@mileskimball
    Just choose a rate of depreciation of paper money relative to e-money that makes its ROR less than Fed funds target & interest on reserves.
    Fri, Dec 21 2012 11:50:49
  9. mileskimball
    Miles Kimball@mileskimball
    When the Fed funds rate target is positive, paper money can appreciate relative to e-money until it returns to par.
    Fri, Dec 21 2012 11:51:43
  10. mileskimball
    Miles Kimball@mileskimball
    If inflation is zero, to be able to continue to return to par, what is needed is for the real interest rate to be positive on average.
    Fri, Dec 21 2012 11:52:35
  11. mileskimball
    Miles Kimball@mileskimball
    Or say the health of the banking system required Fed funds rate to be at least 2% above the ROR of currency, avg r > 2% allows return to par
    Fri, Dec 21 2012 11:54:22
  12. RebelEconProf
    Josh Hendrickson@RebelEconProf
    @mileskimball I thought you wanted a legal restriction on paper currency, but what you want is currency to circulate at a discount at i<=0?
    Fri, Dec 21 2012 11:57:08
  13. mileskimball
    Miles Kimball@mileskimball
    .@RebelEconProf Yes! The minimum distance change from the present system is most likely to actually be adopted.
    Fri, Dec 21 2012 12:08:24
  14. JonathanProber
    Jonathan Prober@JonathanProber
    @mileskimball Don't you feel cash is already currently returning about zero to most folks (less if adjusted for inflation)?
    Fri, Dec 21 2012 11:52:25
  15. mileskimball
    Miles Kimball@mileskimball
    .@RebelEconProf Yes! The minimum distance change from the present system is most likely to actually be adopted.
    Fri, Dec 21 2012 12:08:24
  16. JonathanProber
    Jonathan Prober@JonathanProber
    @mileskimball Don't you feel cash is already currently returning about zero to most folks (less if adjusted for inflation)?
    Fri, Dec 21 2012 11:52:25
  17. mileskimball
    Miles Kimball@mileskimball
    .@JonathanProber Under the current system, currency yields zero. That is too high because it puts a floor under the Fed's target rate.
    Fri, Dec 21 2012 12:10:02
  18. mileskimball
    Miles Kimball@mileskimball
    .@mileskimball @JonathanProber A floor under the Fed's target rate is a ceiling on how much the Fed can stimulate the economy without QE.
    Fri, Dec 21 2012 12:10:58
  19. ryanlcooper
    Ryan Cooper@ryanlcooper
    @mileskimball Doesn't a bit of inflation help price imbalances from building up? @Noahpinion
    Fri, Dec 21 2012 11:44:42
  20. mileskimball
    Miles Kimball@mileskimball
    .@ryanlcooper Individual prices can go down! So relative prices can adjust.
    Fri, Dec 21 2012 12:15:26
  21. mileskimball
    Miles Kimball@mileskimball
    .@ryanlcooper At 0 overall inflation, goods prices will trend down, service prices up.
    Fri, Dec 21 2012 12:15:48
  22. JonathanProber
    Jonathan Prober@JonathanProber
    @mileskimball What would be your preference re mon policy? Fiscal policy? Wouldn't fiscal policy be more effectual than more mon pol easing?
    Fri, Dec 21 2012 12:14:29
  23. mileskimball
    Miles Kimball@mileskimball
    .@JonathanProber Absent the zero lower bound which e-money eliminates, M policy superior to fiscal because it doesn't add to national debt
    Fri, Dec 21 2012 12:19:09

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Miles Kimball

Professor of Economics and Survey Research at the University of Michigan

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