1. Allow all people and other entities to deposit and transact in central bank deposits in the same manner as depository institutions. Commercial bank deposits will also continue to exist in their current form. This will create an open marketplace for central bank deposits which will increase monetary policy effectiveness by directly affecting funding costs and monetary wealth of a greater number of entities. Policy would be more equitable because benefits of reduced funding costs would be offered to all instead of a limited number of financial institutions.
2. Re-orient monetary policy to directly interact with all people 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, growth or inflation it can affect the target interest rate by expanding the supply of central bank deposits directly and evenly into all adult citizen's accounts while open market operations and other policies are performed as necessary. The rate of growth of direct money issuance to public will be periodically adjusted in order to ensure that on average in the long run all growth in central bank money occurs through direct money issuance (DMI) and no net issuance or contraction of central bank deposits occurs through open market operations when interest rate targeting. All expansion or contraction in the monetary base through open market operations will only be short term.
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 monetary wealth.
Direct issuance of central bank deposits to people on a non lending basis 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.
Higher monetary wealth due to DMI would 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 under DMI through increased money balances of central bank counter-parties. Asset holdings are concentrated with the wealthier people owning a large proportion of assets and many people owning few or no assets. Therefore under the present system increases in wealth from increased asset prices don't reach large parts of the population which diminishes the effectiveness of monetary policy. Wealthier people's propensity to spend out of income is lower than the overall average therefore monetary policy induced increases...Click here to read the full article