New Challenges: The Future of Digital Money, Currency Competition, and Central Banks Independence

Can private cryptocurrencies affect monetary policy, will the digital renminbi challenge US dollar, will populism make central banks lose their independence: Kenneth Rogoff answers Ruben Enikolopov's questions.

Dialogue Chain. Episode 14. Ruben Enikolopov, rector of the New Economic School, and Kenneth Rogoff, Professor of Economics, Harvard University.

Enikolopov: Dear Ken, thanks a lot for agreeing to talk with me. It’s been a while since you taught me macroeconomics, and there’re a lot of interesting changes in the world since then.

Rogoff: For sure.

Enikolopov: That’s actually what I wanted to talk about: the new challenges that came up in the recent years. And one of the big challenges that we kind of expect to face and are already facing a little bit is the rise of cryptocurrencies and how they will affect the monetary policy and put additional limits and challenges on the workings of the central bank. So, I really want to hear your opinion on what are the main challenges, what is the future of cryptocurrencies.

Rogoff: I think cryptocurrency has some interesting technologies, there’s a lot going on in the digital space. But narrowly speaking – what people think of is bitcoin and cryptocurrencies – I don’t think they have a long-term future, and I don’t think they’ll affect monetary policy. Because I think regulation will come in: the issues like money laundering, tax evasion. They have to obey the same rules and regulations as everything else. And I think once that falls into place their liquidity will collapse and we won’t see them. But the rise of digital currencies, potentially those that are not crypto, and certainly, potentially central bank digital currencies – that’s a big thing. And an even bigger issue is the challenge that tech presents to banks, because the future of finance is data, like in many things. And the big tech firms are better at data than banks, and banks are very nervous about it. And that’s a big challenge to central banks.

Enikolopov: One set of issues that you’ve mentioned is that currently only the private cryptocurrency exists and so when we talk about cryptocurrencies they are the private ones. So, the future if I got it right from your analysis is that there is much more potential we could expect of the rise of cryptocurrencies related to central banks. But what about this technology aspect of central banks and competition between different central banks?

Rogoff: It’s not impossible but it’s not easy to see what’s going on. Chinese are issuing a digital currency. It’s what’s called a permissioned currency that has this central part that knows everything. Initially, the Chinese have it only for domestic use. But it clearly is aimed eventually at taking a larger market share. That poses challenges because it’s much easier to cross borders, and you can do it in quantity. I don’t think that – if we back up a second – I don’t think that’s gonna be easy to challenge the dollar. That’s gonna take time. There’ve been so many predictions that the dollar would become less important and euro would become important, and RMB would become important. And in fact, exactly the opposite is happening. I had a paper with Ethan Ilzetzki and Carmen Reinhart in a very recent Quarterly Journal of Economics talking about just the rise of the dollar and how many countries backed the dollar. Just being digital doesn’t really change that. However, having a state-permissioned digital currency does open up competition in certain spheres.

And also a big advantage that China has over, say, private digital currency is that they can guarantee it. You can use it somewhere, you can use it in the world’s first or second biggest economy. And a private currency, if the US bans it and other countries ban it, there’s no place to use it. Of course, you can use it for buying drugs or hiring an assassination person but it’s very illiquid. But if China’s saying, "We will treat the digital RMB exactly like we treat the paper RMB in our system", that gives a tremendous liquidity. It still doesn’t push out the dollar for the larger global economy as the Chinese economy grows, as the Chinese capital markets deepen, provide a base, on which maybe to challenge the dollar. That is a long time off.

Enikolopov: So, for now, we can be relatively secure that the dollar will still be dollar.

Rogoff: We can definitely be… Definitely. Never say definitely. But, yeah. The dollar has paradoxically, even if the US economy gets to be smaller and smaller share of the world, the dollar gets a bigger and bigger share of global bonds, global exchange rate pegs, global… what people fix their prices to. Just across everything in reserves, central banks‘ reserves. But it is still day , it’s quite significant having state digital currencies. Especially, from a really big economy that can guarantee liquidity.

Enikolopov: Okay. So, a challenge to central banks recently, in developed countries especially, comes from like a new wave of populism. That challenges what generally is considered to be one of the great achievements of macroeconomics – the independence of central banks. So do you think this is like a temporary phenomenon that this is like post-crisis realignment of political forces or that it is something that’s here to stay and we may see this kind of backtracking? And the independence of central banks, is it really at a serious threat?

Rogoff: Well, it’s an interesting question. I mean I wrote a paper recently, “Is This the Beginning of the End of Central Bank Independence?”. I don’t think it is but we may see individual countries where it happens. Having central bank independence has probably been the single most successful macroeconomic policy since [John Maynard] Keynes in terms of providing stabilization and growth. At least, I think that’s what the vast majority of economists believe. It’s worked in many ways: it’s tamed inflation, it’s stabilized inflation. So, say, having independent central banks has provided a locus of technocratic expertise that’s been more broadly useful in the government.

But there’re threats to this from both sides. There’re people who love central banks’ independence and they say, “Well, fiscal policies run so badly. Why don’t we push some of that onto the central bank?” That is a very dangerous idea. Helicopter money is an example – and my friend Ben Bernanke had, you know, tentatively raised that issue from time to time – when you just give out money to people. But the thing is: you can’t have unelected officials, technocrats, making decisions about whom to give money to. The central bank doesn’t have the political legitimacy. And there’re many-many policies where they want the central bank, people want the central bank to do that. This is deeply misguided. It would end central bank independence. Then, there’s a whole other view in the United States: modern monetary theory where they basically want to reabsorb the central bank into the government and use it as an engine for printing money to pay for social programs and to redistribute income. I’m all in favor of social programs, I think we need to redistribute income more in the United States. But let’s tax people who have higher incomes and transfer the money to those who have lower incomes. The idea of printing money as a “free-lunch” – this has been tried in many Latin American countries, in Turkey, probably Israel. Many-many countries have tried modern monetary theory. And it actually works for a while but then eventually ends up not only with high inflation and a crisis, you end up with lower real wages than you started with. But there’s a conversation about this.

Enikolopov: So, you’ve raised this important issue about accountability to public eventually whether it’s elected or unelected, people who make the decisions. But surprisingly, it looks like the independence of central bank if you look at it across the world, it was really successful regardless of the political system of the country.

Rogoff: So, that is a very important point. And I have to say I hadn’t expected it. So, I think I wrote the first paper on central bank independence – well, it’s the first theory model – by 1985, Quarterly Journal of Economics paper. And when I wrote it, really only a couple of countries – the US and Germany – had an independent central bank. And I had a very difficult time getting it published. I got it rejected almost in return mail at the Journal of Political Economy, the American Economic Review, Review of Economic Studies, and the comment was always the same, saying, “Well, this is just a façade. If the government ultimately doesn’t want the central bank to be independent, they’ll walk all over it. And it can’t work.” And they were talking about advanced countries. And in fact, not only has it worked phenomenally well in advanced countries but it has worked surprisingly well in emerging markets where it has been a factor in helping to tame inflation. But central bank independence is different in different countries. 

Certainly, in Russia in 2015, I wouldn’t say you had an independent central bank in the way the USA does, it’s a different system of government. But the Сentral Bank was phenomenally successful in dealing with the crisis that looked like you were gonna have another 1998, it looked like you were gonna have another full-blown financial crisis. I think it didn’t happen because the Central bank very courageously let the exchange rate move, work to stabilize the inflation. They got a lot of criticism from your president publicly. He must have supported it privately. But it has been very successful. One marker of that is certainly that Elvira Nabiullina won “Central Banker of the Year”. Who would have imagined that the Central Banker of the Year would come from Russia? And that helped earn space for the central bank. Although, I mean, I still wouldn’t regard Russia’s central bank as being as independent as, say, the US or the ECB.

Enikolopov: Although then, recently, there were actually some worries about independence of the US [central bank] at least, in sense of reacting to the speeches of the president.

Rogoff: But our president has a lot less power than your president, at least.

Enikolopov: For sure. It’s all relative to…

Rogoff: Yes.

Enikolopov: So, I really wanted to touch on another really-really big issue, in which Russia is also a big player, which has to do with everything: it has to [do] with the environmental change and how we deal with this problem, especially, at the international level because a lot of the issues are completely unsolvable by a single country. It really requires a lot of inter-country cooperation. What do you see like as main challenges there? Because clearly there are conflicts of interest between developed and developing countries. How do you see? How can we overcome these difficulties and solve this issue?

Rogoff: Well, virtually all economists – maybe it’s an exaggeration – but a huge majority of economists think that the only way forward, in the long run, is a global carbon tax, not a complex system of quantity restrictions but literally a global carbon tax that creates a similar price, it taxes the externality. Doesn’t seem like the cost would actually end up being that great. And that would solve the problem.

Enikolopov: But politically that doesn’t fly, as we see.

Rogoff: No, politically, it doesn’t fly. And I certainly said that to political leaders, and their eyes glaze over, you know, when they see it, they don’t like to hear that word. But I think we will get there. I think it’s the only long-term solution and we will eventually get there. But certainly, a difficult piece of this is that the advanced countries are no longer the biggest source of global carbon emissions. Asia is by and large. But cumulatively, they created the problem, and so to suddenly say to that poor Asian countries, “Well, we created the situation, you have to help solve it”, especially, when you look at some of the challenges they face. Asian countries have very new coal plants, they’ve just built them. They’ve built lots and lots of coal plants. And the average age of a coal plant in Asia is something like 12 years, and in the US… I’m sorry, in the advanced countries it’s something like 44 years. And life expectancy of a coal plant is only 50 years or 60 years or so. So, for us, to say, “Oh, we just gonna phase out coal”, it’s nothing. Whereas in Asia the phasing out has a huge cost. I think that we need some form of accommodation transfer, I proposed a World Carbon Bank as an idea of trying to help with this problem. But it is a massive problem, I think. One of the couple of big problems of our time.

Enikolopov: Okay. So, thanks a lot for talking about these really global questions. And my last question to you is whom would you like to talk to on next edition of these Dialogues?

Rogoff: Well, I think the way this goes, I can’t ask you because I might have indeed been very interested. I had you as a student in Harvard and I’d be very interested in everything you’ve learned since. But I actually would love to talk to Vladimir Mau, who I met in 2015 and had many interesting ideas. And I’d like to have an update, to see what he thinks now.

Enikolopov: Great. Thanks a lot.