Typography

Say that the local lottery system has decided to innovate. Lottery tickets can now be used as money. A ticket with a face value of $x can be used to buy $x worth of stuff at any checkout counter in the country. Or they can be held in digital form and transferred instantaneously across the lottery's new payments system to friends, the utility company, or the government tax department. With the payments infrastructure in place, will people actually use lottery tickets to pay their bills, transact with friends, or settle their taxes? Can lottery tickets become money-like? I'm skeptical. Here's my thinking. Say that Jane has just bought $10 worth of digital lottery tickets. At the same time she's chosen to leave $10 in her bank account (she likes the fact that they aren't risky). She spies a coffee stand and suddenly has an urge to buy a $2 coffee. When she arrives at the till, how will she decide to pay? With lottery tickets or deposits? By paying for the $2 coffee wit...

The Bank of England recently announced that it will end a 300-year tradition of allowing employees to keep chequing accounts at the Bank. You can see an example of a cheque above, which is marked with the sort code 10-00-00. Traditionally, folks like you and me have only been able to get a piece of the central bank's balance sheet by holding banknotes. Central bank deposit accounts, which are far more convenient, have been limited to banks and other financial institutions. But the BoE provides a rare example of regular people, specifically employees, being permitted to directly own fully transferable central bank deposits, at least until recently. The BoE's termination of this seemingly archaic practice is especially interesting in the context of growing efforts to crack open central bank balance sheets to those who have traditionally been hived off from them. A concrete step in this direction is the Federal Reserve's overnight reverse repurchase facility, which allows mon...

John Cochrane has written  two posts  that question the ability to implement negative interest rates given the wide range of 0%-yielding escape hatches available to investors. These escapes include gift cards, stamps, tax & utility prepayments, and more. In a recent post entitled However low interest rates might go, the IRS will never act like a bank , Miles Kimball and his brother rebut one of Cochrane's supposed exits; the Internal Revenues Service. I've responded to Cochrane's other schemes here . Think of Cochrane's exits as arbitrage opportunities. As nominal rates plunge into negative territory, the public gets to harvest these outsized gains at the expense of institutions that issue 0% nominal liabilities. The Kimballs' point (and mine here ) is that because these institutions will lose money if they continue to issue these liabilities, they will implement policies to plug the holes. Cochrane's multiple exits aren't the smoking gun he takes them...

Last week Citi's Willem Buiter published a note on the three ways to get rid of the effective lower bound to nominal interest rates, one of which is to abolish cash. He goes on to say that politically, the abolition of currency would run into opposition from some of the legitimately cash-dependent poor and elderly, from those for whom the anonymity of cash is desired because they are engaged in illegal activities and from libertarians. The first constituency can be helped, the second can be ignored and the third one should take one for the team. I think that Buiter is wrong to characterize libertarians as necessarily opposed to the abolition of cash. Their take on cash is probably (or at least should be) a bit more nuanced. Since libertarians generally advocate government withdrawal from lines of business like health care or liquor retailing, an exit of central banks from the cash business should be a desirable outcome. What Buiter is advocating is a bit more extreme than just gov...

Shibboleth , by Doris Scalcedo John Cochrane writes an interesting post that makes the case that removing or penalizing cash would not remove an economy's 0% lower bound. Briefly, the zero lower bound problem arises when a central bank tries to reduce the interest rate on central bank deposits below zero. Because cash always yields a superior 0% yield, everyone will race to convert their deposits into cash, thus preventing a negative interest rate from ever emerging. By removing cash, this escape route is plugged and a central bank can safely guide rates to -4 or -5%. Cochrane's point is that even if cash is removed, there are a number of alternative 0% yielding 'exits' to which people will flee, the effect being that rates will be inhibited from falling much below 0%. The examples he provides includes prepayment of taxes, bills, and mortgage payments, and the hoarding of gift cars or stored value cards like subway passes. In a follow-up post , he mentions a strategy o...

Does a lowering of a central bank's interest rates create inflation or deflation? Dubbed the ' Sign Wars ' by Nick Rowe, this has been a recurring debate in the economics blogosphere since at least as far back as 2010. The conventional view of interest rate policy is that if a central bank keeps its interest rate too low, the inflation rate will steadily spiral higher. Imagine a cylinder resting on a flat plane. Tilt the plane in one direction —a motif to explain a change in interest rates—and the cylinder, or the price level, will perpetually roll in the opposite direction, at least until the plane's tilt (i.e. the interest rate) has been shifted enough in a compensatory way to halt the cylinder's roll. Without a counter-balancing shift, we get hyperinflation in one direction, or hyperdeflation in the other. The heretical view, dubbed the Neo-Fisherian view by Noah Smith (and having nothing to do with Irving Fisher), is that in response to a tilt in the plane, the...

John Cochrane has had a few interesting comments on Greece leaving the Euro, here , here , and here . Cochrane doesn't believe in the consensus view that a Greek default means a Greek euro-exit. He thinks Greece can default and stay in the Euro. He also makes the good point that Eurobonds already exist... in the form of Target2 transfers. His last post illustrates how difficult it would be to create a new drachma. I am sympathetic to many of his views. I had an interesting debate in the comments section of his last post on the difficulties of creating a new drachma. Someone pointed out that Gresham's law dictates that bad drachmas will easily drive out good euros. Therefore, drachmas will quickly gain currency. This is a mistaken view of how Gresham's law works: Gresham's law only applies when there are two circulating currencies and the authorities successfully enforce a peg such that one currency is artificially overvalued. The undervalued currency disappears from cir...