• Wed. Jun 22nd, 2022

A central bank digital currency could help fight inflation

ByHazel R. Lang

May 18, 2022

A central bank digital currency theoretically enables micro-targeting with real-time feedback

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I’m not one to say that Canada needs to have a central bank digital currency. The privacy implications alone are concerning.

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But the recent bashing of the central bank by Conservative leadership candidate Pierre Poilievre gives rise to an interesting insight into the potential benefits of such a currency in terms of monetary policy.

Perhaps a little too passionately, Poilievre criticized both high inflation under current Bank of Canada policies and the idea of ​​a CBDC, something he said he would ban s he eventually became prime minister.

What if the latter could be the solution for the former?

We don’t yet know what precise form a CBDC might take, or even whether such a currency would replace cash, exist alongside it, or replace current forms of electronic payment. Even China, the game’s favorite, did not carry out any large-scale tests.

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But looking at such a currency at its most basic level – a digitized, programmable form of money – it’s easy to see that it has the potential to alleviate what has long been monetary policy’s biggest problem: that it is a blunt instrument.

While the current inflation spurt has complicated origins, with many factors, much of the blame has fallen on central banks, whose economic levers often have widespread effects that are difficult to predict and only measurable in the aftermath. Critics say the banks have gone too far in one direction by overstimulating the economy amid the pandemic.

A central bank digital currency theoretically allows for micro-targeting – maybe by sector, maybe by region, maybe by socio-economic class – with real-time feedback, and that could be invaluable next time around. that the economy will need to be stimulated.

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The disruption of advertising markets is a good comparison. Companies used to only target specific airtimes or print publications based on the general expectation that the type of customer they wanted was listening or reading, and that was almost everything. Facebook has shaken up the game by allowing companies to advertise directly to hyper-specific groups — recent immigrants in their twenties on the suburban West Coast who love board games, for example.

Although we would probably never get that detail with a CBDC, it would be the same general idea.

There is a Bank of Canada research paper on this specific topic: “A CBDC may allow different interest rates on different balances or on different types of accounts… This flexibility can help central banks implement policy. money more efficiently.

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Geoffrey Yu, senior strategist at Bank of New York Mellon Co., went further and wrote that ground-level pandemic stimulus checks could also have been more effective with a CBDC.

When the government distributes money to people, writes Yu, “the CBDC wallet app can be programmed so that the funds in it can only be spent in designated areas and also have a certain date. exhalation… So the stimulus could be biased to help a designated sector.

It is true that a lot of this is already possible without digital currency. Singapore, for example, distributed S$320 million in vouchers amid the pandemic that could only be spent on the local tourism sector.

The problem, however, is time. Even if the government didn’t have to coordinate with the tourism industry, just giving everyone US$1,200 as the US government did “still required legislation, additional scrutiny and cooperation with commercial banks, among other cumbersome procedures,” Yu wrote.

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And then you don’t know if those efforts were too little or too much until months later, when the data is coming back through the layers of organizations. Quantitative easing and lowering interest rates have the same kind of limits – which is one of the main reasons the economy is in the mess it is in.

It is not necessarily the fault of the Bank of Canada. It’s just that, even with all the models in the world, economics is still what theorists would call a game with incomplete information.

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So back to the advertising analogy: another revolutionary feature of digital campaigns was near-immediate feedback, allowing companies to hone their techniques in real time. This is what a central bank digital currency could do.

Much of this could blur the line between monetary policy and fiscal policy. It could mean expanding the role of the Bank of Canada or bringing it closer to the executive branch of government, beyond what some are comfortable with.

But there is no mold for it. The current idea of ​​inflation targeting, for example, was only launched in 1990. Monetary policy is constantly evolving, as is the role of the central bank.

And, as former Bank of Canada Governor Stephen Poloz writes in his new book, The Next Age of Uncertainty, the future could look much more turbulent, straining the capacity of current policy tools.

In this context, there are certainly advantages to thinking a little outside the box.

Ethan Lou is a journalist and author of Once a Bitcoin Miner: Scandal and Turmoil in the Cryptocurrency Wild West.

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