October 12, 2021
  • October 12, 2021

NChain article on ‘electronic reimbursement via retail CBDC’ offers new monetary policy tool

By on September 29, 2021 0

A recently published paper, authored by an nChain researcher, looks at a new monetary policy tool activated by a retail central bank digital currency (CBDC): sector-specific cash payments on private consumption spending . The paper examines how electronic cashback and different cashback rates can improve the economic toolkit as a way for central banks to target inflation rates.

Entitled “Cashbacks Falling from the Sky: Can Retail CBDC Deployment Expand Central Bank Toolbox?” The article was published by nChain researcher Dr. Vlad Skovorodov and former nChain researcher Dr. Zamid Aligishiev.

A new, more effective monetary policy toolkit

The paper sought to examine optimal monetary policy in an economy characterized by multiple sectors, asymmetric shocks, and rigid price adjustments. Optimal monetary policy, in such cases, targets a certain weighted measure of inflation.

In most Western countries, low interest rates have been at the heart of monetary and fiscal policies, sometimes to the point of reaching the zero mark and limiting the ability to stimulate economic growth.

And in modern times, economic shocks have multiplied, the most recent being the COVID-19 pandemic. These result in varying economic signals and effects for the various industries. Relying on outdated policy tools, central banks have been unable to target specific areas, resulting in asymmetric shocks due to consumer spending.

According to the two researchers, rather than relying on injections per investment, as advocated by fiscal policies, central banks should explore electronic cashback that stimulates the economy through consumer spending.

The researchers propose a model of consumer behavior with respect to varying time frames and opportunity costs, and explore how different reimbursement rates can trigger economic growth by maximizing consumer utility.

They offer a two-way money transfer system between a country’s central bank and households, made up of two inputs.

The first input is the face value of a household’s purchases in a given sector of the economy, while the second is the proportion of those purchases that the central bank decides to reimburse or withdraw. These monetary instruments are sector rates on nominal consumer spending. The paper calls these rates cashback rates, with positive cashback rates being transfers from the central bank to households characterized by monetary expansion, and negative rates being the opposite.

“From an economic point of view, the difference in design between this system of transfers and the conventional interest rate policy would boil down to directly shifting the demand for goods produced in a given sector (which needs intervention) rather than influencing aggregate demand. for all goods ”, underlines the document.

Cashback rates can complement existing monetary policies in two ways, the two researchers say. First, the repayment rate is positively related to the inflation rate. As such, there would be an effective lower bound on deflationary policies, unlike the current configuration focused on inflationary policies.

Second, cashback rates give central banks additional instruments to allocate resources more efficiently.

One of the most important applications of cashback instruments is to supplement usual monetary policies when the rate hits the lower limit of zero. This is when the nominal short-term interest rate is at or near zero, creating a liquidity trap and restricting the ability of the monetary authority to stimulate economic growth.

“Due to the nature of cash back payments, these instruments have a lower limit for deflationary, not inflationary, policies. Thus, it is possible to stimulate economic activity by introducing cash payments even when interest rates cannot be lowered further, ”the researchers note.

Using blockchain technology to improve monetary policy tools

A retail CBDC is best deployed through a token-based solution built on an open blockchain.

The document notes: “Blockchain technology is particularly suitable because it allows the collection of large amounts of transaction-specific information while effectively maintaining the pseudo-anonymity of the end user. A blockchain ledger-based retail CBDC design can record data on transaction amount, product type, and the physical address of the retailer or producer, without compromising sensitive personal information.

Real-time big data collected on transactions via a blockchain-based solution allows the monetary authority not only to improve the accuracy of economic surveillance, but also to develop a toolbox that allows it to intervene only in the very specific segments of the economy in which these interventions are most needed.

nChain further notes, “One aspect of the proposed solution that is perhaps less talked about is the ability to perform economic data analysis at an effectively incremental and instantaneous rate. In other words, we no longer need to limit ourselves to survey data as an indicator of inflation, but can now monitor price developments to better reflect economic realities and target individual sectors accordingly. , more transparently. “

An electronic cashback system as described in the paper would require a blockchain network that scales without limits to support real-time big data. The blockchain would also need to charge extremely low fees for it to be feasible nationally and regionally. Bitcoin SV delivers that, being the only massively scalable blockchain that targets adoption by businesses.

nChain is already laying the groundwork to make such a solution possible at the national level, working with the island nation of Tuvalu on the first-ever national digital ledger and infrastructure project on Bitcoin SV. The company has partnered with the government of Tuvalu, community technology consultancy Faiā, and Bitcoin consultancy Elas Digital on the project.

A national citizenship registry and potential digital currency solutions will be the first two solutions to be deployed on the national ledger.

Watch: CoinGeek Panel Zurich, Tuvalu: A country’s National Digital Ledger on BSV

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