2022
July 11, 2022
IMFS-CFS Special Lecture
Dr. Joachim Nagel, President, Deutsche Bundesbank
"Digital Euro - Opportunities and Risks?"
In an increasingly digitalized world, Bundesbank President Dr. Joachim Nagel explained how a digital euro can safeguard the anchor function of central bank money and what the opportunities and risks are in this context. During a Special Lecture organized by the Center for Financial Studies (CFS) and MFS on July 11, Nagel particularly emphasized the opportunities that a digital euro could open up for both private individuals and companies. In everyday life, the digital euro could enable simple payment - "just as we know it from cash, but digitally" and be usable in stationary retail as well as online. But cashless payments between private individuals or with public authorities would also be possible.
According to Nagel, a digital euro could "support progress and increase Europe's sovereignty" in payment transactions within Europe. Until now, there has been no single, cross-border solution for e-commerce or card payments for the euro area that is based on European infrastructure. With a digital euro, digital payments could be executed independently of non-European payment infrastructures, Nagel added. "This would reduce risks and dependencies in payment transactions, which would also beneficial to financial stability."
In light of frequently cited disadvantages such as the risk of a bank run or structural disintermediation - when bank customers shift a significant portion of their bank deposits from their checking account to digital central bank money - Nagel urged prudence. "In the event of an introduction, it will initially be necessary to design the digital euro with an eye to keeping the potential risks manageable." From Nagel's perspective, however, the positives outweigh the negatives: "In my view, we should take advantage of the opportunities that digital central bank money offers. It has great potential."
In the ongoing digitalization, the introduction of a digital euro is also an important measure from a monetary and currency policy perspective, according to Nagel. "Central bank digital currency could be an important building block for public money to continue to act as an anchor for all forms of money denominated in euro, even in an increasingly digitalised economy."
The discussion about a digital euro should also be understood as the monetary guardians' response to the development of so-called cryptocurrencies such as Bitcoin and Ether. That's because, unlike cryptocurrencies, a digital euro would also allow private commercial bank money to be exchanged for central bank money in the digital world.
The central banks of the Eurosystem have been examining the possible introduction of a digital variant of the common currency for some time. In July 2021, the European Central Bank (ECB) gave the go-ahead for a two-year investigation phase in which questions about technology and data protection will be clarified. According to Nagel, the Eurosystem has currently identified two different design options: an online option, through which payments are processed by a third party, and an offline option, in which payments are made directly from person to person. A decision on the general introduction is to be made in the fall of 2032.
In this context, Nagel also highlighted CFS and IMFS research on current developments in the financial system. "Cooperation between central banks and state-of-the-art research institutions is of great importance if the stability of the financial system is to be ensured as best as possible going forward." He added that the Bundesbank is fortunate to have several of these in close proximity.
May 30, 2022
IMFS Distinguished Lecture
Christopher Waller, Member of the Board of Governors, Federal Reserve System
"The Economic Outlook and Some Thoughts on a Soft Landing"
The U.S. Federal Reserve does not rule out further interest rate hikes of 50 basis points. At his IMFS Distinguished Lecture on May 30, Fed Governor Christopher Waller said that the members of the U.S. Federal Open Market Committee (FOMC) are committed to bring inflation back down toward two percent. „It is the FOMC's job to meet our price stability mandate and get inflation down, and we are determined to do so.“
According to Waller, the combination of strong consumer demand and supply constraints—both bottlenecks and a shortage of workers relative to labor demand—is generating very high inflation. „Once inflation expectations become unanchored in this way, it is very difficult and economically painful to lower them“, he warned.
Inflation in the United States, as measured by the Fed's preferred indicator, the PCE price index, was last seen rising 6.3 percent for the year. The April consumer price index (CPI) was up 8.3 percent year over year. In March, the Fed had raised its interest rate for the first time since late 2018, by 25 basis points to between 0.25 and 0.5 percent. That was followed in early May by a unanimous half-percentage-point increase to the new rate range of 0.75% to 1.00%. Fed representatives signaled that they would follow up with further strong upward steps to keep inflation in check.
In his presentation, Waller countered fears that further interest rate hikes could lead to distortions in the labor market. For this purpose, he resorted to the concept of the Beveridge curve, which captures the negative relationship between the unemployment rate and the job vacancy rate. The curve generally slopes downward, indicating that vacancies tend to be higher when the unemployment rate is lower, and vice versa.
Waller pointed out that the current situation was unique with the job vacancy rate reaching a record level. „We’ve never seen a vacancy rate of 7 percent before“. However, the COVID-19 pandemic has caused the Beveridge curve to shift in an unprecedented way. „Reducing the vacancy rate by 2.5 percentage points would still leave it at a level seen at the end of the last expansion, whereas in previous expansions a reduction of 2.5 percent would have left vacancies at or below 2 percent, a level only seen in extremely weak labor markets“. Waller was therefore optimistic that further interest rate steps would not slow down the labor market.