The Banking Executive Magazine - July 2022 Issue

Inflation and Crypto ultra-risky assets ripe with criminality will be of concern for policy-makers and regulators alike. ELECTRONIC MONEY STANDARD AND ZERO INFLATION TARGET The International Monetary Fund IMF Analysis series by Ruchir Agar- wal and Miles Kimball published in April 2022, reflects about the future of inflation and discusses how a move to an electronic money stan- dard can lower the inflation target to- ward zero. A world with lower inflation (and even zero inflation) and no persistent recessions may sound like a dream, but it is possible by transitioning to an “electronic money standard.” Breaking the zero lower bound im- plies that the optimal rate of inflation will be lower than in the presence of the lower bound. This will empower central banks to quickly restore full employment and, over the medium term, possibly move toward targeting full price stability with zero inflation. Electronic money is money that is in- stantiated as an entry in a bank’s computer. This includes the use of checks, credit cards, and debit cards in transactions. Given this definition of electronic money, the alternative to the “paper standard” can be called the “electronic money standard”. A zero lower bound can be broken through a combination of adopting or strengthening an electronic money standard in which electronic money is the unit of account and imple- menting a time-varying interest rate (or more generally, rate of return) on paper currency (cash). Then, as the interest rate on cash moves in line with the official policy rates, there is no arbitrage between cash and money in the bank. Operationally this can be done while remaining quite close to the current monetary system, but there are several legal, communication, and political chal- lenges to a transition to such an elec- tronic money standard. An essential element of an electronic money standard is that it does not re- quire the elimination of paper cur- rency to enable deep negative rates. It is enough to modify paper cur- rency policy. Any arbitrage between cash and electronic money is at the expense of a central bank’s balance sheet. Moving from a paper standard to an electronic money standard can em- power monetary policy to cut inter- est rates as much as needed for economic stimulus during recessions while enabling a gradual shift to zero inflation target as depicted in Figure 3. the BANKING EXECUTIVE 12 ISSUE 163 JULY 2022 Figure 3. Past, Present and Future of Monetary Systems (Source: Bank of England, United States Federal Reserve, International Monetary Fund) Future monetary system