Panicos Demetriades's picture
Affiliation: 
University of Leicester
Credentials: 
Professor of financial economics
Former Governor, Central Bank of Cyprus and ECB Governing Council member

Voting history

Central Bank Digital Currency for the UK

Question 1: How beneficial would it be to the UK economy for the Bank of England to introduce a central bank digital currency in some form in the upcoming decade?

 

Answer:
Beneficial
Confidence level:
Very confident
Comment:
It can be both beneficial and harmful for the reasons alluded to in the literature that you cite. It is hard to imagine a topology in which central banks displace financial intermediaries, although I agree with Haldane that in that world banking crises can be avoided. The reason is that without fractional reserve banking, we lose the inherent instability due to bank runs, but we also lose financial intermediation provided by the banks, which helps address all kinds of imperfect information problems in finance. Thus, it is not at all obvious that abandoning fractional reserve banking is in the public interest - indeed the Diamond Dubvig model shows that financial intermediation can help achieve the Pareto optimal allocation, as long as we can prevent bank runs from occurring (which explains lender of last resort and deposit insurance). If CBDC is introduced by BoE and indeed other CBs, it will likely be through financial intermediaries providing the interface, as central banks in general should not be aiming to displace intermediaries by taking deposits directly from the public. It will also likely come with relatively low limits, e.g. no higher than deposit insurance limits to prevent unfair competition with commercial banks. Additionally, there will have to be strict anti money laundering (AML) checks - something that the economic literature has not addressed. It is inconceivable that CBDC end up facilitating money laundering - which unregulated digital currencies often do.the reputation risks are so high that central banks should do everything possible to prevent it - which means there have to be identity checks at least at the entry point. A lot of work needs to be done to study CDBC by central banks considering introducing them, given the opportunities, challenges and risks. The outcome of this process in my view is that B digital currencies, if and when introduced, will be well regulated and will not constitute a AJ or source of competition to commercial banks. As such, their impact will be limited but on balance somewhat beneficial. Otherwise, they will not be introduced!

Asset Prices and Monetary Policy

Proposition 2: Asset prices and financial imbalances are best addressed using macroprudential tools and left out of the monetary policy decision making process.

 

Answer:
Strongly agree
Confidence level:
Extremely confident
Comment:
Yes. Please see my previous answer. Muddling the waters of monetary policy with macroprudential objectives is a recipe for destroying whatever is left of central bank independence. For further details, please see my latest book: Central bank independence and the future of the Euro, Agenda Publishing, 2019.

Proposition 1: The Bank of England’s mandate should be officially modified to take housing or other asset prices into account in its monetary policy decisions.

Answer:
Strongly disagree
Confidence level:
Extremely confident
Comment:
Asset prices should be dealt with macroprudential regulation and tools. Macroprudential policy is now well defined and central banks can use it to address asset price growth that threatens to create financial instability. Within Basel III, there are various macroprudential tools that can help contain asset price growth, such as countercyclical capital requirements and leverage ratio. If macroprudential policy is failing to use them, for whatever reason, it is not the job of monetary policy makers to assist. Monetary policy should only respond to asset price growth to the extent that it affects core inflation. There is one dimension of asset price growth that economists often ignore - the political economy dimension. Asset price growth makes the wealthy wealthier. Often ruling elites create obstacles to appropriate macroprudential policies. However, getting help from monetary policy makers to address asset price growth is wrong: it would make monetary policy more political than necessary. Central bank independence, which is at the heart of the success of inflation targeting, could be at risk if monetary policy becomes more political. In other words, two wrongs do not make a right. Macroprudential policy needs to be strengthened and protected from political interests. Monetary policy should remain apolitical.

The “Spend Now, Tax Later” Budget

Question 3: Which of the following best characterizes the pace at which the budget addresses UK’s medium term fiscal challenges (deficit and debt)?

Answer:
Other, or no opinion
Confidence level:
Extremely confident
Comment:
It is a largely pointless exercise to make the Conservative Government appear fiscally prudent. It is questionable whether their measures, especially the rise in corporation tax, will have much of an impact on the deficit. With inflation low and incomes not rising the same can also be said about the personal taxation measures. In any case, the emphasis now should be on the recovery and only if and when that recovery is fully and robustly in place, the Chancellor should start to be concerned about the deficit. With the right support measures, in fact, the ensuing growth and job creation could well be budget neutral. In a deep recession, fiscal multipliers are well above unity. Now is an opportunity for smart public investments that should not be missed.

Question 2: To what extent will the “super deduction” aide the UK’s recovery from the Covid recession?

Answer:
Moderately
Confidence level:
Very confident
Comment:
It will certainly bring investment forward, as other economists have said. That will no doubt expedite the recovery, but unless it creates many new jobs, it will not make a substantial difference.

Pages