22 December 2014

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The Centre for Monetary Advancement seeks to develop and promote a monetary system structured to provide greater economic stability and sustainable long term growth through efficient and equitable institutional arrangements. CMA is a not for profit and nonpartisan organization.
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The Direct Public Money Issuance Proposal (Brief)

Two basic central bank reforms to increase monetary policy effectiveness, equality and reduce systemic risk:

1. Extend the provision of electronic deposit accounts or e-money by the central bank (CB) to all people and other entities instead of only depository or financial institutions. The CB is tasked with providing the supply money and should therefore also provide an efficient electronic means of making payments and depositing the money it creates. Physical notes, coins and commercial bank deposits or other forms of broader money will continue to exist in their current form.

2. Re-orient monetary policy so the monetary authority directly interacts with the public as counter-parties instead of only a limited number of financial institutions.  When the monetary authority is pursuing expansionary monetary policy in order to attain its goals related to unemployment, GDP growth or inflation it can affect the target interest rate (if interest rate targeting) by periodically expanding the supply of central bank deposits directly and evenly into all citizen's accounts while open market operations and other policy tools are utilized when necessary. The rate of monetary growth through helicopter drops to the public will be periodically adjusted by the central bank in order to attain its targets while temporary open market operations or securities issuance may be employed in order to fine tune the short term interest rate or contract the monetary base. E-money heli-drops or direct money issuance (DMI) would represent a more effective version of helicopter drops because central bank independence is not compromised and the central bank can directly interact with the public as direct counter-parties. New legislation would need to be crafted to allow central banks to perform DMI.

Principle benefits of proposed reforms

The various stimulatory or contractionary effects as a result of adjustments in short term interest rates will continue under DMI with the addition of new direct mechanisms of action through increased public nominal monetary wealth.

Direct issuance of central bank deposits to people will nominally increase monetary wealth of recipients by the amount of newly created monetary base. Under asset purchases or lending the newly created money received by the central bank counter-party does not result in an increase in wealth because it is offset by a new liability or the loss of an asset. Portfolio balance effects may increase wealth under a regime of asset purchases or money lending but the higher money supply itself will not. The central bank balance sheet will not be adversely affected when it issues money directly to public if the money it issues is recognized as equity instead of a liability. The public are the constituent of the central bank so recognizing money as a form of bearer equity instead of a liability is more appropriate if money is issued directly to people.

Higher monetary wealth due to DMI would positively affect spending and creditworthiness of people.

In a climate where the short term interest rate is at the zero lower bound (ZLB) the current central bank counter-parties have very little or no opportunity cost when holding reserves due to low investment returns and therefore expansions of central bank money should have a reduced impact on growth and inflation. The overall public on average have a higher opportunity cost when holding money compared to central bank counter-parties due to foregone utility from consumption or other spending. Financial entities such as the current central bank counter-parties are oriented towards realizing profits from investing and inter-mediating whereas people gain greater utility from consuming. Therefore expansions of funds to public would more effectively create growth at the ZLB.

The wealth effect as a result of portfolio re-balancing will continue to manifest as it does at present but an additional wider reaching increase in wealth will also prevail...

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