A recently published paper, whose authors include a researcher from nChain, delves into a new monetary policy tool enabled by a retail central bank digital currency (CBDC): sector-specific cashback payments on private consumption expenditure. The paper looks at how electronic cashback and varying cashback rates can enhance the economic toolkit as a way for central banks to target inflation rates.
Titled “Cashbacks falling from the sky: Can retail CBDC rollout widen central banks’ toolkit?” the paper was published by nChain researcher Dr. Vlad Skovorodov and former nChain researcher Dr. Zamid Aligishiev.
A new and more efficient monetary policy toolkit
The paper sought to examine the optimal monetary policy in an economy that’s characterized by multiple sectors, asymmetric shocks, and stickiness in price adjustments. The optimal monetary policy, in such cases, targets some weighted measure of inflation.
In most Western countries, low interest rates have been at the core of monetary and fiscal policies, sometimes to the extent of hitting the zero lower bound and limiting the capacity to stimulate economic growth.
And in the modern times, economic shocks have been on the rise, the most recent being the COVID-19 pandemic. These lead to varying signals and economic effects for the various industries. Relying on the outdated policy tools, central banks have been unable to target specific fields, leading to asymmetric shocks from consumption expenditure.
According to the two researchers, rather than relying on injections by investment, as fiscal policies advocate for, central banks should explore electronic cashback which provides economic stimulus through consumption expenditure.
The researchers propose a modeling of consumer behavior against varying time frames and opportunity costs and explore how different cashback rates can spark economic growth by optimizing consumer utility.
They propose a system of two-way monetary transfers between a country’s central bank and the households, consisting of two inputs.
The first input is the nominal value of a household’s purchases in a given sector of the economy, while the second is the proportion of such purchases that the central bank decides to reimburse or levy. These monetary instruments are sector-specific rates on nominal consumption expenditure. The paper refers to these rates as cashback rates, with positive cashback rates being transfers from the central bank to the households, characterized by monetary expansion, and negative rates being the opposite.
“From an economic perspective, the difference in design between this system of transfers and conventional interest rate policy would sum up to directly shifting demand for goods produced in a given sector (that is in need of an intervention) as opposed to influencing the aggregate demand for all goods,” the paper outlines.
Cashback rates can complement the existing monetary policies in two ways, the two researchers believe. First, the cashback rate is positively related to the inflation rate. As such, there would be an effective lower bound on deflationary policies, unlike in the current setup focusing on inflationary ones.
Second, the cashback rates give the central banks additional instruments enabling them to allocate resources more efficiently.
One of the most important applications of cashback instruments is to supplement the usual monetary policies when the rate hits the zero lower bound. This is when the short-term nominal interest rate is at, or approaching zero, creating a liquidity trap and restricting the monetary authority’s ability to stimulate economic growth.
“Due to the nature of cashbacks payments, such instruments have a lower bound on deflationary policies, not inflationary ones. Thus, it is possible to stimulate economic activity by introducing cashback 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 via a token-based solution constructed on an open blockchain.
The paper notes, “Blockchain technology is especially suitable as it provides a way to collect large quantities of transaction-specific information while effectively maintaining the pseudo-anonymity of the final user. A retail CBDC design based on a blockchain ledger can record data on the transaction amount, commodity type, and physical address of the retailer or producer, without compromising sensitive personal information.”
The real-time big data collected on transactions through a blockchain-based solution enables the monetary authority to not only improve the precision of economic surveillance, but also to develop a toolkit that allows it to intervene only in the very specific segments of the economy in which these interventions are needed the most.
nChain further notes, “One aspect of the proposed solution that is perhaps less talked about is the ability to perform an analysis of economic data at an effectively incremental and instantaneous rate. In other words, we no longer need to be confined to the survey data as a proxy for inflation, but can now monitor price developments to better reflect economic realities and target individual sectors accordingly, in a more seamless manner.”
An electronic cashback system as described in the paper would require a blockchain network that scales unbounded to accommodate real-time big data. It would also require the blockchain to charge extremely low fees for it to be feasible at national and regional levels. Bitcoin SV offers this, being the only massively scalable blockchain that targets enterprise adoption.
nChain is already laying the groundwork to make such a solution possible at a national level, working with the island nation of Tuvalu on the first-ever national digital ledger and infrastructure project on Bitcoin SV. The firm has partnered with the Tuvalu government, community-tech consultancy Faiā and Bitcoin consultancy firm Elas Digital on the project.
A national citizenship registry and potential digital cash solutions will be the first two solutions to be deployed on the national ledger.
Watch: CoinGeek Zurich panel, Tuvalu: A Country’s National Digital Ledger on BSV
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