Central bank digital currencies can help fight inflation

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I’m not saying that Canada needs a central bank’s digital currency. Only the impact on privacy is a concern.

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However, the recent central bank bashing of Conservative leader candidate Pierre Poirievre has created interesting ideas about the potential benefits of such currencies from a monetary policy perspective.

Perhaps a little enthusiastically, Poilievre has criticized both high inflation and the CBDC’s idea under current Bank of Canada policy.

But what if the latter is the solution to the former?

It remains to be seen what exact form the CBDC can take, or whether such currencies will replace cash, exist with cash, or replace current electronic payment methods. I do not know. Even China, the front runner of the game, has never done extensive testing.

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But considering such currencies at the most basic level (digitized and programmable form of money) could alleviate the blunt instrument that was the biggest problem in monetary policy. Is easy to understand.

The origins of current inflation are complex and have many factors, but central banks have many responsibilities. Central bank economic instruments are often difficult to predict and have widespread consequences that can only be measured in the aftermath. Critics say banks have gone one way too far by overstimulating the economy in a pandemic.

Central bank digital currencies, in theory, use real-time feedback to enable micro-targeting, perhaps by sector, region, and socio-economic class. This is invaluable the next time you need to stimulate the economy.

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The turmoil in the advertising market is a good comparison. Companies have targeted only specific broadcast times or printed matter based on the broad desire that the type of customer they want is tuning or reading. Facebook has overturned the game by allowing businesses to advertise directly to super-specific groups. For example, a recent immigrant on the outskirts of the West Coast who likes board games.

Probably not as specific as the CBDC, but it’s the same general idea.

There is a research paper by the Bank of Canada on this subject. “CBDCs can take into account different interest rates on different balances or different types of accounts … This flexibility helps central banks implement monetary policy more effectively.”

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Geoffrey Yu, senior strategist at the Bank of New York Mellon Co., goes a step further and writes that ground-level pandemic stimulus checks may have been more efficient with the CBDC.

When the government distributes money to people, Yu writes: The specified sector. “

To be sure, many are already possible to some extent without digital currencies. For example, Singapore distributed a S $ 320 million voucher in a pandemic that can only be used by the local tourism sector.

But the problem is time. Even if the government doesn’t have to coordinate with the tourism sector, just giving everyone $ 1,200, like the U.S. government, “among the tedious procedures, legislation, additional scrutiny, and cooperation with commercial banks. I needed it. ” Write.

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And until a few months after the data comes back through the layers of the organization, we don’t know if there were too few or too many such efforts. Quantitative easing and interest rate cuts have the same kind of restrictions. This is one of the main reasons why the economy is in turmoil.

It’s not necessarily the Bank of Canada’s fault. That is, even in all models of the world, the economy is still what theorists call games with incomplete information.

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So let’s get back to the advertising analogy. Another breakthrough feature of digital campaigns is near-immediate feedback, allowing businesses to fine-tune technology in real time. That’s what you can do with central bank digital currencies.

Many can blur the line between monetary and fiscal policy. That could include expanding the role of the Bank of Canada or getting closer to the government.

But there is no one type for this. For example, the current idea of ​​inflation targeting was pioneered only in 1990. Monetary policy is constantly evolving, and the role of central banks may be evolving.

And, as former Bank of Canada Governor Stephen Poloz wrote in his new book, The Next Age of Uncertainty, the future may be more confusing and weigh on the capabilities of current policy tools.

In that sense, there are certainly benefits 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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