Research Topics

Fractional reserve regimes generate fragile banking, and full reserve regimes (e.g., narrow banking) remove fragility at the cost of suppressing the role of banks as lenders. A Central Bank Digital Currency (CBDC) could provide safe money, but at the cost of potentially disrupting bank lending. Our aim is to avoid this potential disruption. Building on the recent literature on CBDCs, in this study we propose what we call the “CBDC next-level model,” whereby the central bank creates money by lending to banks, and banks on-lend the proceeds to the economy. The proposed model would allow for deposits to be taken off the balance sheet of banks and into the balance sheet of the central bank, thereby removing significant risk from the banking system without adversely impacting banks’ basic business. Once CBDC is injected in the system, irrespective of however it is used, wherever it accumulates, and whoever holds and uses it, it will always represent central bank equity, and no losses or defaults by individual banks or borrowers can ever dent it or weaken the central bank’s capital position or hurt depositors. Yet, individual borrowers and banks would still be required to honor their debt in full, lest they would be bound to exit the market or even be forced into bankruptcy. The CBDC next-level model solution would eliminate the threat of bank runs and system collapse and induce a degree of financial stability (“super-stability”) that would be unparalleled by any existing banking system.

Seigniorage as Fiscal Revenue in the Aftermath of the Global Financial Crisis

This study investigates the evolution of central bank profits as fiscal revenue (or: seigniorage) before and in the aftermath of the global financial crisis of 2008–9, focusing on a select group of central banks—namely the Bank of England, the United States Federal Reserve System, the Bank of Japan, the Swiss National Bank, the European Central Bank, and the Eurosystem (specifically Deutsche Bundesbank, Banca d’Italia, and Banco de España)—and the impact of experimental monetary policies on central bank profits, profit distributions, and financial buffers, and the outlook for these measures going forward as monetary policies are seeing their gradual “normalization.”
 
Seigniorage exposes the connections between currency issuance and public finances, and between monetary and fiscal policies. Central banks’ financial independence rests on seigniorage, and in normal times seigniorage largely derives from the note issue supplemented by “own” resources. Essentially, the central bank’s income-earning assets represent fiscal wealth, a national treasure hoard that supports its central banking functionality. This analysis sheds new light on the interdependencies between monetary and fiscal policies.
 
Just as the size and composition of central bank balance sheets experienced huge changes in the context of experimental monetary policies, this study’s findings also indicate significant changes regarding central banks’ profits, profit distributions, and financial buffers in the aftermath of the crisis, with considerable cross-country variation.