Comments on “The Implications of Digital Currencies for Monetary Policy and the International Monetary System”

Abstract

This chapter collects the slides from Prof. Andrew Rose (U C Berkeley and Dean NUS Business School since 2019) who commented on Prof. Engels’ “The Implications of Digital Currencies for Monetary Policy and the International Monetary System” (see Chapter 7).Prof. Andrew Rose agreed with the main conclusion that private sector digital currencies would have little immediate effect on monetary policy or the international monetary system. However, the potential of digital currency to increase capital mobility over time may make the choice between fixed exchange rate and monetary sovereignty sharper. Digital currencies may facilitate the loosening of capital controls. Prof. Rose commented that private digital currencies, even in aggregate, are fairly small: the total stock of them is less than 2% of worldwide currency and less than 4% of daily foreign exchange transactions. Because of their inherent volatility, private digital currencies do not meet the requirements of being money: a medium of exchange, unit of account and store of value. Private digital currencies cannot discipline the central bank’s monopoly on money supply. More fundamentally, it is not clear if private (decentralized) digital currencies can be algorithmically designed to stabilize prices, counter business cycles and serve as a lender of last resort, all of which are currently functions residing with the monetary authority.Prof. Rose argued that a central bank digital currency can indeed give a monetary authority the flexibility to offer negative interest rates. A central bank, however, needs to safeguard against hacking and create its own ‘know your client’ (KYC) protocols and risks substituting practices for commercial banks’ deposits. He further pointed out that with or without a central bank digital currency, the monetary authority’s policy assignment remains: a society gives its central bank power and independence in return for price and financial stability.