If the share of payments made by cryptocurrencies increases, government-issued money will face market competition from private issuers. The column argues that, even if this system could maintain price stability in an economy, the market would not provide the socially optimum amount of money. A government could still, however, maximise social welfare using monetary policy in response to peg the real value of money. The threat of competition from private monies may therefore impose welcome market discipline on any government that issues currency.
A recent literature has documented the impact of firm heterogeneity on workers’ earnings. This column assesses firm heterogeneity in the context of its impact on households’ cost of living. Rich and poor households source their consumption differently, and are therefore impacted differently by asymmetries in heterogeneous firms. An analysis suggests that moderate trade liberalisation could lead to a 1.5-2.5% lower cost-of-living inflation in retail consumption for the richest 20% of US households compared to the poorest 20%.
With the Eurozone in recovery, at some stage the ECB will raise interest rates. This column examines the conditions that might lead to this happening. A statistical analysis suggests that the likelihood of an interest rate increase is currently about 7%, but a combination of stronger growth and higher price pressures could quickly raise this to about 30%. A return of the ECB to its pre-crisis behaviour would also lead to a dramatic rise in the likelihood of an interest rate increase.
Portfolio rebalancing through large-scale asset purchases is one of the major transmission channels under the zero lower bound. This column assesses whether the channel has been effective in Japan, focusing in turn on financial institutions, firms, and households. Japanese firms and households are notoriously risk averse, limiting the effectiveness of the portfolio rebalancing channel. These results suggest that more drastic structural reforms and growth strategies are needed.
The Trump administration has been outspoken in its criticism of NAFTA, which the president has called “the worst deal ever made”. This column, taken from a recent Vox eBook, argues that reversing the current NAFTA policy environment would not simply wind back the clock to the pre-agreement economy from 20-plus years ago. Instead, it would throw spanners and blockages into today’s very different and deeply integrated North American economy.
Other Recent Columns:
- Excess saving and low interest rates: Theory and evidence
- The high costs of being poor in a rich land
- The role of foreign slack in domestic inflation in the Eurozone
- New road infrastructure: The effects on firms
- Globalisation and political structure: Lessons for the EU
- The economic causes of childlessness
- Shopping costs and one-stop shoppers intensify competition
- Agglomeration benefits versus firm selection
- The untapped potential of humanitarian economics
- Refugees have little effect on native worker wages
- Hospital competition and performance in France
- Capital accumulation, private property, and inequality in China, 1978-2015
- Growth and volatility before and after the Global Crisis
- Japan's ‘glass ceiling’ and ‘sticky floor’
- Credit misallocation during the European financial crisis
- Slow productivity growth may not be the 'new normal' for the US
- What next for US-Europe trade policy?
- Incentives, effort, and performance in higher education
- The US Treasury’s missed opportunity
- Completing EMU