The shadow of neo protecionism and coping with the challenges of the normalisation process
IMF-World Bank 2018 Annual Meetings
Reinventing Bretton Woods Committee
Conference, Bali, 11 October 2018
Ladies and Gentlemen,
I'm most grateful to the organisers for inviting me to chair this session on the economics of money and what the future of money should bring. In my brief introductory remarks, I shall focus on the international dimension of central bank issued digital currencies (CBDC) especially how CBDC could address one of the long standing grievances in the international economy, namely inadequate supply and distribution of international liquidity. CBDC could offer a new basis for international currency use and as such have a profound impact on international trade and investments.
Currency exhibits unique features allowing decentralised peer-to-peer payments and instantaneous settlement of all debts. The adoption of digital currencies would make such features available for digital payments facilitating and reducing transaction costs in national and international exchange. To clarify, currency is a small subset of money issued normally by central banks and the only central bank money available to the non-bank public typically in the form of notes and coins.
The impact of CBDC rests on the assumption that new financial technologies will change the properties of currencies and of money itself. CBDC or the tokenisation of currency would add features to currencies that will affect their relative attractiveness. It may help overcome prevailing disadvantages in particular of smaller currencies that are normally not readily accepted or used in international transactions. Technology may be the new comparative advantage for currencies.
The asymmetric distribution of international liquidity constrains orderly balances of payments adjustment. This results in large external imbalances and high exchange rate volatility. The dollar has remained the dominant source of international liquidity and the U.S. the only country that can issue international liquidity. The high dependence on the dollar implies that international liquidity relies to a large extent on national policy objectives of the U.S. This is naturally problematic when national and international liquidity needs diverge.
The international monetary system, the rules governing exchange rates and provisions of exchange market liquidity, is meant to induce economic policies geared towards avoiding the built-up of large external imbalances and exchange rate volatility. It has failed to do so for some time in large part due to inadequate incentives.
The problems of international monetary relations are well known and have been around for decades. Reform challenges and shortcomings can be approximated by the 1922 Genoa conference, the 1944 Bretton Woods agreement and the reforms calls by French President Charles de Gaulle of 1965 and can be summarised by the Triffin-Dilemma. Past reform calls have emphasised the need for reducing dependence on national currencies and give sufficient incentives for symmetric balance of payments adjustment. Any future reform is expected to stay very close to earlier reform objectives.
CBDC may fundamentally affect the propensity to hold central bank money by resident and non-residents. If CBDC produces significant efficiency gains by allowing new scope for peer-to-peer transactions and reduced settlement times, international liquidity requirements could be reduced considerably. It would also allow the international economy to function with more diversified sources of international liquidity and could reduce actual needs for international liquidity assistance.
Technological superiority rather than monetary policy may well become an important determinant of international currency adoption and could represent the definitive success factor replacing conventional criteria such as size and liquidity of financial markets.
CBDC is set to shift international monetary relations. If CBDC can alter supply and distribution of international liquidity, it would ease dependence and burden on individual currencies. New technologies offer a new level playing field and the adoption of certain technologies such as distributed ledger may be decisive to determine the scope for future currency uses and hence their attractiveness and the supply and distribution of international liquidity. The international dimension of CBDC seems to offer one of its most interesting features yet.