The Future of Money and the Central Bank Digital Currency Dilemma

Round 1

Reviewer 1 Report

The paper focuses on a highly relevant topic, and it is placed at the research frontier. It is well-written, and it breeds in an interesting way conceptual theoretical work and applied issues. In my view, the paper is suited for publication, provided the authors deal with some comments.

Major comments

1. While I appreciate the overall work in its applied nature, and also the analysis of a concrete institutional development of monetary operations, I have issues with some concepts which appear to form the background of the authors. For instance, the fact that “the price of any good in the economy is determined by the subjective preferences of the parties involved in an exchange” (p. 4, line 160-161) is questionable, as well as the fact that the current money creation process is, per se, a cause of crises (p. 9, line 359-360). In my view, the worth contribution the authors are making does not need at all this background, which seems to be based on rather mainstream views of finance. As an example, their description of the creation of deposits is fully compatible with a post-keynesian approach (Lavoie 2014). Therefore, I would consider this alternative way of framing things. However, I would also quote some authoritative names of the mainstream. For instance, the authors’ view on how the money demand is formed seems to have the roots in contributions such as Feenstra (1986). If it is so, they should be quoted, as I detect a lack of theoretical citations to their reference background;
2. Given that the topic addressed is closely connected with monetary policy, I would stress the role that a cashless society can enjoy in favouring negative interest rates policy (Rogoff 2017). In fact, while this aspect is briefly mentioned (p. 2, line 44-45), it is a trending topic and it is also linked to the discussion of how new monetary tools and arrangements can impact the economy (Di Bucchianico 2020). Therefore, my belief is that it can help the paper attract attention, and offer another facet to the discussion. Of course, no extensive treatment is required, but I would expand on that.

Minor comments

a) 9, line 356. The authors set forth two assumptions, but the first one is not a real assumption. It is just a conventional way to classify economic recessions;

b) The article opens with the prospect that Facebook digital currency “poses a systemic risk to both the financial system and the monetary sovereignty of most economies” (p. 1, line 27-28). While the event is noticeable, my impression is that such a prospect is way too gloomy;

c) The authors should check accurately for minor mistakes, such as the use of ‘y’ instead of ‘and’ (p. 6, line 262), or the fact that they announce six kinds of risk but list five (p. 7, line 288).

Suggested references

Lavoie, M. (2014). Post-Keynesian Economics: New Foundations. Edward Elgar Publishing.

Rogoff, K. S. (2017). The Curse of Cash: How Large-denomination Bills Aid Crime and Tax Evasion and Constrain Monetary Policy. Princeton University Press.

Feenstra, R. C. (1986). Functional Equivalence between Liquidity Costs and the Utility of Money. Journal of Monetary Economics 17 (2): 271-291.

Di Bucchianico, S. (2020). Negative Interest Rate Policy to Fight Secular Stagnation: Unfeasible, Ineffective, Irrelevant, or Inadequate?. Review of Political Economy 1-24.

 

 

Author Response

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Author Response File: Author Response.docx

Reviewer 2 Report

This is a nice paper on an important and contemporary topic. I enjoyed reading it. 

Comment 1: Relevance of CBDC for main argument

The paper argues in favour of using CBDC to support a transition toward a narrow money financial system. As a reader, I was left wondering what it was specifically about CBDC that would support this conclusion---why not just move to narrow money independently of CBDC?

Comment 2: Addressing counterarguments 

Focusing on sustainability in particular, standard counterarguments against narrow money include the concern that this approach would encourage shadow banking. For example, Turner (2014, Banking in Crisis) argues that post-war financial repression in the UK---essentially a move toward narrow banking---encouraged the emergence of non-bank financial institutions, which ultimately lead to later financial instability.

A second counterargument based on sustainability would relate to the independence of the central bank. Are there independence risks if central banks offer financial products directly to retail customers? Or if their balance sheets are sufficiently large to manage narrow banking?

Beyond sustainability, broader efficiency arguments should be addressed, perhaps with reference to the standard arguments for fractional reserve banking and maturity transformation (Diamond Dybvig, 1983; Calomiris and Kahn, 1991). I understand that the manuscript clearly assumes the importance of financial instability for its analysis, but placing this assumption in wider context would be helpful.

Comment 3: Drafting

I think the paper would benefit from further drafting and editing. At times, the jargon and use of technical terms seems a bit much. If you can identify opportunities to drop technical terms, and to make sure that jargon is explained when it is introduced (rather than in the following paragraphs), a general interest reader will get more from the paper.

I don't think that the Appendix tables add much. Perhaps if they were simpler they could better complement the explanations in the text.

Author Response

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Reviewer 3 Report

I have found the manuscript well written, the analysis thorough and comprehensive and the results interesting and valuable in terms of their contribution to the academic debate on the topic. 

The only modifications that I deem necessary are the following:

• review of the grammar and phrasing;
• Between lines 42 and 49 the authors list the benefits that have been associated to the adoption of CBDC without citing any source. I feel that here some references to which link the claims of those benefits shoulld be added.

Author Response

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