Benoît Cœuré On Central Bank Digital Currencies And The Future Of Monetary Policy

you develop your own cryptocurrency. But there's one type of money that we haven't actually done an episode on yet. Tell me more so. There is a type of money that sort of straddles the world of digital currencies and traditional forms of money, I think, and that is the central bank digital currency or c d C for short.

Oh yeah, No, this is an interesting area because, yes, alongside the sort of emergence of private, uh independent digital currencies, we have seen central banks all around the world do some efforts towards implementing their own or creating their own piloting projects of essentially having yeah, digital versions of cash.

I guess, I guess you would say. And I think China is fairly far along with it's endeavored but I don't think any of them have really taken off yet, but definitely an area that I think a lot of people are pretty interested in for a lot of different policy And yeah, that's the thing is you wouldn't necessarily expect this to be the case, but a lot of the digital currency exploration that's going on right now is

very closely tied to monetary policy. And I have to confess before we start, I have never entirely understood the concept of called central bank digital currencies. I've never quite understood what the problem central banks are trying to solve is, and I've never quite understood how they will function alongside traditional cash and bank reserves and things like that. But I'm happy to say I think we have the perfect person to discuss all of this today and to get

into a lot of those themes. So we're gonna be talking with Ben Watt. Cray was of course on the board of the e c B from two thousand eleven to twenty nineteen, and he's now head of the Bank for International Settlements Innovation Hub, and that group recently published a report on cd d c s, part of a sort of task force that involved a bunch of central

banks exploring this topic. So I think it's going to be a good conversation and hopefully it answers some of the questions that I, at least and probably a lot of other people have had about central bank digital currencies for some time. Yeah. No, I'm really excited because I'm with you in that um, I too have had numerous questions about what purpose they serve, what the central banks

see as the reason for launching them. So hopefully we can get a lot of questions answered, and also hopefully, you know, maybe we could squeeze in a few questions about uh just the economy and monetary policy as well, because of course, Ben, while having served at the ECB for so long, hopefully we get some thoughts about the state of the world today, which of course still an

extraordinary time. Yeah, and I think, weirdly there might be some natural overlap between two currencies and what's going on right now in the global economy. So, without further ado, Ben walk Curay, thank you so much for coming on all thoughts welcome. Thank you very much for having me so in the intro. Joe and I both just admitted to not necessarily understanding digital occurrencies from central banks, maybe just to begin with, you could sort of explain the concept.

And maybe one thing that's always confused me is if we were to see something like a digital dollar or a digital euro, how would that differ two For instance, me holding a euro or a dollar in a traditional electronic bank account, what is it that makes that digital money different to you know, align in in my bank. So yeah, I mean, these are these are excellent questions because you may wander, I mean, we're living in a in the world which is already massively demateralized. Most of money,

I mean more than money is already digital. So might wonder why why all of a sudden now we discussing digital currency. And so we're here to discuss central bound digital currency, right CBDC. And so let me focus on on the on the CB in CBDC, that is a definition of CBDC. It's money that is issued by the central bank, meaning it's a liability of the central bank. Um, it's not the liability of a commercial bank or any

other player. It is digital, so it's not physical like bank notes, and it's not issued to bonks as part of monetary policy as we as we know it, which is as bank reserves. Right, So bank reserves is as if you think about it, it's money that bonks have on their account with the central bank. It is digital, so it is central bank digital currency and it has

been existing for for decades. So here we're talking of any liability of the central bank which is digital but not issued to commercial bonks as part of the implementation of my type policy, which means to things. Either it is digital and issued directly to citizens, so it's a the equivalent digital equivalent of a bank note, and that would be entirely new. Or it is issued to commercial bonds, but not as a deposit on an account, but as a token for instance, which gives give the answer to

your initial questions. So what's the what what the question? We are we're trying to answer what the problem statement? Well, there are two problems statements. The first one is what happens if cash disappears, if citizens don't want to use bank notes anymore, and how we happy if the only way they have to pay for their expenses consumption is to use commercial money money, should buy bonds to draw

from their bank accounts? Or do we want to keep providing them with central bank money which today doesn't exist in a digital form, so that the first question and the second question is what happens if at the core of the system, banks or financial market infrastructures would need central mark money to set all the transactions in a way that is not an account at the central bank,

and that could be a token for instance. So imagine a future, maybe a near future, where some financial market infrastructures would be um transacting exchanging tokens on on d l t s. Right, if you want to keep settling these transactions in central mark money, then you need a way to either connect the DALT with the traditional payment infrastructure or to issue a central bank token to the d LT And that's what we call wholesale CBDC. So

there are two answers. Either it's whole sale CBDC because the technology underlying financial infrastructures is changing, or it's retail CBDC because in some places at least cash may be disappearing. So these are two separate questions at both ends of the financial system, at the front end and at the back end. First of all, that was very helpful, just sort of overview of what you're doing or what the

vision is. I guess one way that I sort of think about it or here, what you're saying is, rather than seeing the analogy as Okay, here's a money. If I have it in a bank, it's a liability of a bank. If I have it in some sort of payment app like PayPal or Venmo, that dollar or that euro is a liability of PayPal or Venmo. This is more like cash, something that I hold in the wallet, and something that's a direct liability of the central bank. So that part makes sense to me. What is the

fundamental advantage, however, of doing this? So we have cash that currently exists, we have online money or sort of bank liability money as you described it, What from a policy standpoint would in your view, the creation and widespread adoption of a digital euro or a digital dollar or a digital pound. What are the advantages that you see

for governments and central banks to actually launch them. So my my answer, and that might might might be surprising coming from a central banker, but that my answer would be that it's not even a policy discussion. It is a political discussion. The key question here is are we satisfied if all money used by citizens for their daily

transactions is commercial money? That is how we satisfied if the whole functioning, the daily functioning of the economy is a at the end of conversation between citizens and and banks, right or do we want the central bank as a public institution to be part of it? And what's very important here and also for the for the rest of our discussion, is that the answer might be different in

different places. That is, in some places citizens may trust and in many places I guess citizens would trust the central bank better than visa, master card or Facebook or city bank. Right in other places or in other corners of societies, that might not be the case. And you will find many people who who trust city bank more better than the central bank, and you would you you find people who trust bitcoin more better than the dollars

or the yero. And so the conclusion here is that we have to let to let people decide for themselves which kind of money they want to use, provided that they are well informed on the risks, on the on

what on the implications. But the emerging consensus is that a substantial fraction of society will ask to keep that contact with the central bank, which is the ability to use a direct liability on a public institution under parliamentary supervision as part of a political system, and if we want to keep that kind of access, then we need to do CBDC. So that's really interesting because you've framed more direct contact between people and the central bank through

cb dcs as an advantage or something desirable. But I know one of the criticisms of digital money is that there is a concern that you're in effect reduced in the role of commercial banks in the economy, and that might have unintended consequences for the transmission of monetary policy or the way the financial system actually works. Some people

have talked about the potential to increase bank runs. For instance, if people have a central bank issued alternative that's seen as a safe place to park their money, they might fly fly out of bank deposits and and go into digital money. How are you thinking about about that particular issue, How are you thinking about how CBDC might impact the

financial system as it exists today. So that's a that's a very important point, Tracy, And that's that's also why why I'm saying that we need an ecosystem right and contact. What what people sometimes hear or think the there is no intention by central bonds to to have a monopoly

on all kinds of money. The economy is are operated with commercial money today or when you when you when you buy a beer in a bar, it's very very likely that you're going to pay either with a credit card or with a telephone, and that will be eventually coming from your bank account, and it's commercial money, that's not a claim on the central mark, and we're going to keep it like that, right, So so we'll we'll, we'll, we'll, we'll keep an ecosystem where you'll have different forms of

different means of payments, different forms of money, and most of it will be commercial. The question is do we want to keep central mark money at the heart of the system to uh to to to make it stable? Right, And one of the of the key considerations that we we have in thinking about the future ecosystem is exactly what you mentioned, which is we don't want CBDC to

to kill bonks, right. We don't want to go to the to the extreme of a system where all economic players would use CBDC um and bonds would at best be kinds of conduits would buy assets or extend credits and and fund on the on capital markets, you know, narrow banks or or a system of sovereign money at that it's sometimes called or in Switzerland had a vote, as you may remember, on some something called Folgal which

was rejected. So that's people that that's something that most people don't runt, and that's something that regulators and sattle bankers don't runt because they see your value in the existence of commercial bonds as institution who take risk, who transform credit, who take maturity risk and credit risk uh and would do all kinds of financial intermediation in the economy.

We don't want to kill that system. And so there is an active discussion on how to to mitigate the kind of risks your highlighting treacy, which is that CBDC would take over bank deposits and would would would make banks more vulnerable. And there are different answers. We can go into the details if you wish, And one of the of the important discussions will have in the coming months and years is what's the best answer if we don't want this to happen. I want to ask take

it from the other angle. I mean, one of the nie things about cash as we know it. If I pay for something in the bar, if I you know, go out and meet up with friends and want to split a check somewhere or anything else. Is that it's anonymous person a or somewhat anonymous person A can pay something to person be without person ce knowing about it. And they are all kinds of reasons why people prize privacy.

I'm curious if in your vision of a c B d C A, would two people be able to make a transaction without some third party entity having a sort of centralized knowledge about who just made that transaction. And I'm curious in your conversations around with regulators and central bankers, I'm sure you talked to a lot of different groups,

law enforcement agencies about their concerns. Finn send you think about know your customer, anti monitor uh, anti money laundering laws, And I'm curious whether in your converse stations and consultations we've also talked to privacy groups about their concern So, UM, yeah, I mean we've been doing that in particular when last year, UM, there was a related discussion not on on CBDC, but on stable coins right um, start starting from liberal right um,

And there has been an active discussion in policy circles on how to regulate stable coins and the FSB just came with a report on that with with guidelines on on a stable kind of regulation. And privacy is also a key, a key issue. And by the way, something we found out that financial regulators don't often talk to

to privacy regulators or two privacy groups. And so that's uh, let's say, it might sound like a kind of an ancillary discussion, but it's actually very important that this this kind of technical innovation forces us to also to read things the way we we do regulation and to connect to connect silos right which which until recently weren't connected at all. And so and so we are talking now

with privacy regulators and with privacy groups. And that's an instance of choices that have to make that have to be made by by society and and and through a political process. Because on the one hand, you have a demand, you have demand for privacy which is there and which is absolutely legitimate, and which is already in some places like Europe very much unshrined and had hard wired into

lower with with with GDP are in particular. But on the other hand, you also have a regulation and and and and and laws against money wandering, against the financing of terrorism, etcetera, which are equally important, right, and so so any any CBDC architecture will have to strike a balance between these two aspirations and the exact the way

we turn the dial. I imagine you should be a political discussion, because I I don't see how central bankers or bank supervisors could decide on on the on that kind of things. It has to be political discussion. And again there are ways to reconcile. So for instance, I'm just giving an example, so I'm not I'm not saying that's the way to go, but just to illustrate, you could imagine a system where CBDC would be distributed by banks. Right, so the front end would be banks. You would keep

talking to your bank. You wouldn't you wouldn't go directly to the to the FED or the HKm, MAY or the or the E c B. You would get your CBDC from your bank, just as you get your bank notes from your A T M. So exactly the same as today. Banks would buy a given quantity of CBDC from the central Bank using their bank reserves, just as

they buy bank knows today. And see, the central bank could regulate the amount of CBDC for monetary policy purposes, but the central bank would not know exactly to which CBDC has been distributed, and that would be subject to m L and c FT and and generally no customers diligence and I know your client client rules just as any transaction today. So that's a possible way that do

reconcile different aspects. You mentioned Libra briefly, which is Facebook's attempt at a at a stable coin, and this sort of reminds me of of another big discussion when it comes to c b d C, and I guess part of it is that if you're going to launch digital money, even if you're a central bank, you're going to have to have some sort of payment system that goes along

with it. And so central banks are going to have to decide whether to build and run their own payment systems or maybe to team up with companies in the private sector who can do that for them. I'm curious. Private corporations like Facebook are pretty good head technology. How do central bank compete against companies like that like a Facebook, or how do they work together with them for the

payment system. So we shouldn't be competing against against Facebook because we are not in the same line of business right, we're absolutely not in the same line of business and and in the sense that's so if if I may take a step back, that's that's exactly why these um You mentioned the report which was issued by seven central banks together with the bis UM, and that's a working group I was culturing with a certainty from the Bank

of England. It started exactly with the consideration that we we central bankers, have to come back to first principles UM and and too often the discussion on digital money digital currency UM started from the wrong place, like started from the technological end of the discussion. Are we going

to do CBDC using blockchain? And if it's a blockchain, is that going to be corder or hyper ledger or whatever else, which is an important discussion in due time, but it's not it's not the right the right place to start from. We want to start from first principles.

And as a central banker, I would say our job is to is twofold, is to ensure price stability or monetized stability, meaning that you should have the ways and means to implement your monetipe policy, whichever moneytype policy you've decided. As a as a Monetipe Policy Committee. That's the first thing, and CBDC should not hamper that. And if it can help, it's even better. We can discuss it later. And the

second thing is financial stability. And an essential part of financial stability is the existence of core payment systems at the heart of the financial infrastructure, which connects financial institutions, which connect jurisdictions, and which a low real time settlement in central bank money. Right, and so the key role of the central banks really is at the heart of the system to provide stability. And we don't want to

take over. And there are many many things, most things that we we won't we wouldn't do well and we're not going to do so. To give an obvious example, if CBDC comes as as a token, most likely is going to be handled in in wallets, right, So you would have a wallet on your phone, say with with CBDC with central bank tokens in it. That's not something central banks should be doing. It's it's very obvious to

all of her. That's wallets are something for the private sector to do, right and so and so there there there is room for everyone. There is room for everyone. The key thing is any form of commercial money has to be regulated, right, and there there might be a financial stability considerations which would lead us to impose some requirements like settlement in central bank money. But apart from that, we need the private sector to innovate. All that innovation

will come from the friend sector. I'm not I'm not aware that central bankers are particularly good that you know, at finding new technologies. That's not what we do. Okay, Can I ask you a question? I mean, you mentioned stable coins. We talked about Libra, and I think that there is a sort of spectrum of what we see in the stable coins space, from sort of extremely projects that attempt to be very uh legitimate Facebook as Facebook Libra is probably one of them, to others that are

probably a little dice here. What is the regulatory case for the existence of stable clinates because central bankers regulators have been pretty permissive it seems of them for a while. And I'm curious why from your perspective they're beneficial and why uh sort of people should be able to use a currency on the distributed ledger somewhere that is ultimately backed up by a sort of licensed, licensed bank. Well, I wouldn't really see um stable coins as currencies, so

it's it's a little bit of a misnomber um. I would see stable coins as um as new payment systems which are very well, very integrated, back to end, a

close loop payment systems. So it's a it's it's a little bit different from the kind of innovation that we've seen until recently in the payment world, which was really at the front end, right, it was about, you know, providing you with a better interface, providing you with an interface on your smartphone and son and so forth, And all of a sudden we see payment architectures which are entirely private, which which are encompassing and go and include

the the back end, that is the pipeline that will that will bring money from one place to another, right, which wasn't the case so far, and um, and that might be okay. That might be okay if it's well regulated, if consumers or investors are protected and know the risk the risks they are taking, that might be okay to have that kind of payment systems. I don't see I don't really see that as the currency. I think that as a new means of payment which can be convenient,

but which also raised as risks. And these risks have been highlighted last year in the in the G seven report and stable coins and and uh and and recently by the by the FSB UM and the risks come from the fact that these new projects are are global. Liberal is an obvious example. And so there are risks to the for instance, to the to the functioning of the international monetized system which are entirely new, which you

you didn't have with earlier forms of cryptocurrency. Like what happens if you have a major stable coin which is being issued and you start to see substitution with with local currency in some smaller jurisdiction. That would be a concern for that jurisdiction, would be a concerned for the I m F, would be a concern for the World Bank.

And that's something that we want to discuss. So so you see new risks coming, right, But there is no reason why a priori stable coins should be h rejected and and and and and let me let me just as a just for for the record mentioned there are other forms of stable coin which hardly anyone speaks about,

which are wholesale stable coins. Right, imagine a coin that would be issued by a by a large commercial bank to settle transaction within a few a small group of clients, and that would be backed by by central bank money. That's a stable coin. It's much less of a discussion because it's not going to reach billions of people, but only a handful of commercial banks. So that's pretty easy to to to understand and to regulate. But it's also coming.

My understanding is that one of the big debates about digital money from central banks is whether it would strengthen the transmission of monetary policy. So, on the one hand, if you have CBDC, central banks can directly influence interest

rates on digital money and they basically control it. But on the other hand, your as we discussed potentially setting up a competitor to bank deposits, and we're not exactly sure whether or not that might change the sensitivity of the demand for that type of money to interest rates. I be curious to get your views on is how do you see CBDC interacting with monetary policy. That's a

really good question. It's a little bit the elephant in the room because that's a it's a really good question, and that's it's a it's a question that most central banks are working hard to not to answer and see, I take the report we've been we've been discussing. We we we kind of allude to that, but we are very early on the front. We say we're not going

to discuss it, right. And there is a simple reason to that that, which is that monetary policy is a is a different mandate and it's it's it's very national, it's very domestic, and it's being decided in different places like I mean monetary policy committees, um, and so central bonds don't want to mix up the two discussions because if CBDC comes and the way they will use it for money type to do monetype policy is something that

they want to decide for themselves. And so the case for international cooperation today is not on the monotype policy side. It's on the payment side, because we want the payment architecture to work smoothly and it is global, right uh.

And this is why, this is why you already see and you're going to see a lot more international coordination on CBDC and on digital money generally because payments are the the backbone of the of the international financial architecture, and so you won't go to see coordination for the

system to be stable. Well. Monetype policy is a sovereign matter, is decided locally people and and and governors want to talk to their and to report to their to their parliaments, right to US Congress, to the European Parliament, et cetera. That's not something they want to discuss in the open air and internationally. So so that was a little bit of a sociological or political you know, the tour to to to explain, to explain to you why we're not

discussing it now. Of course, it is an issue. Of course, it is an issue that central banks will have to to decide for themselves. And I really see a key question coming for for each and every central bank to decide, which is do you want to do CBDC for monetary policy reasons or do you want to make it as neutral as possible on the way with respect to the way you implement your monetype policy. And that's a decision to take early on, because it impacts your architecture, It

impacts the way you're going to do CBDC. Right, if you want CBDC to be accessed by your broad range of economic players and if you want to be able to control both the quantity and the price of that particular form of money, which is what monet type policy is about. Then it's different from deciding that you you're going to issue a given amount of CBDC and then you you don't want to know where it's going, for instance.

And so there is a potential to use CBDC in a kind of tailor made way right in a kind of very very granular way to um to bring money to particular places, to uh to to to pump money down the last mile as a as my colleague I was in constance has has one said, that's that's that's something that today's Central Bank is very much want to see money being pumped down the last mile and and

reaching all players, all corners of society. UM. But if you want to do CBDC to do that, then you probably have to to design your CBDC in a different way. And and Central Box have not decided yet really, so we're a little bit at a cross roads there, and

different Central box may take different decisions. And so my person my personal take if you're which which doesn't commit anyone, and I'm not even doing money type policy because I'm had the bi s so it's it's really my personal view is that it is worth reflecting on that because we we're kind of at the end of a cycle where monetipe policy. We've made money type policy implementation incredibly sophisticated since the Great Financial Crisis and again now through

the years of corner crisis. But most of it, if not all of it, he goes through capital markets, right, So we have very different sophisticated ways, complex ways to influence on capital, on financial market expectations, and on and and and on pumping money in and I out of capital markets. But at some point that's hitting the limits because our places in the economy where money just which

money just cannot cannot reach. It also might create political issues because incredibly incredibly societies see monetype policy as being a conversation between central bonks and and capital market participants

um and they feel excluded from that conversation. So that that was my my last word that the e c B last year, in my last speech in my last meeting at the ECB, the conclusion was that if if money type policy remains a conversation between central banks and capital markets, then we shouldn't be surprised if people don't trust us, right, And that's a little bit what we've seen. And CBC can be a way to reconnect central banks

with with people if it's if he's done well. But some central banks might want to go there, so we don't want to go there, and that's fine. They're all different. I mean, this might be a good moment to sort of seg a little bit to some of the bigger

policy questions that the world faces right now. But it seems to me like a point that you've made which I find really interesting, and a few of your answers is like a lot of these are just political questions, and political questions have to be made to some extent outside of the central bank. But I guess one of them is do we want monetary authorities to have the ability to more easily put buying power in the hands

of normal people, not just functioned through capital markets. And it sounds like the sort of CBDC conversation that the world is having is sort of a parallel potential conversation to this question of do we want to expand the tools that central banks have to get people money? Yeah? I would, I would agree with that, And I mean the fact that there are political dimensions. So it doesn't imply that central banks should defer to two politicians, right CBDC.

CBDC is about the future of money, it's about the future of multi policy, it's about the future of payments, and so central banks should be on on top of that discussion, which which which they are now. But what I guess what we're both saying is there are dimensions, there are some trade offs where you need to to get a sense of of the preferences of society. You need to you need to take the pulse of society.

And that's why in all places CBDC will require um extensive consultations, which is the way the for instance, the Riggs Bank in in Stockholm has taken, which is always easy b now is taking. You need to consult a lot. That's not something that you want to do under closed door in a in a central somewhere. You that's something where many dimensions where which need their engagements with society

at large. So I know there's been some discussion on potentially tearing interest rates when it comes to cb d C and and maybe even allowing the Central Bank to impose negative rates on digital money that they issue. That probably says more about where we are in terms of unconventional monetary policy as a whole than it does necessarily about c B d C. But maybe that should be a que too, to broaden the conversation and talk a little bit about what's going on in the world at

the moment. I think when you were at the ECB, there was an assumption that monetary policy would eventually get back to normal, But it seems increasingly likely now that low interest rates and asset purchase programs, things like that are here to stay. Do you think we're ever going to get back to the days of boring central banking where we would never be talking about negative interest rates when it comes to CBDC. Yeah, well that's truely through that term. I'm now old enough that I remember the

days where interest rates were positive. Le see, these were the good old days. And the year the Corona, the Corona crisis, the Corona shock as there has disrupted everything.

So I think it's fair to her, it's fair to say that there is no prospect, there is no short term prospect of money typolicy normalization anytime soon because of the the amounts extraordinary amount of uncertainty that we have, which which comes from from outside the economy, which comes from the UM from the cycle of lockdowns and UH

and and waves, etcetera. And so as long as we will have this kind of waves and uncertainty on lockdowns, there will be the economy will be in a state for very high fragility because UH expectations will because there is no way that they are that that that businesses or consumers can form expectations about the future, so that that that that kind of compresses the time horizon of of both businesses and consumers in a way that that makes it very very difficult to to plan for the

long term, which is what central banks should be doing now in there. If you think of the kind of assignment of roles in the in the economic policymaking world, you would expect central bankers to care for the long term, while politicians are kind of prisoners of their of short term incentives and constraints and political cycles and underlike UM and you would like central bankers to think for the for the future. But today's count because it's just too uncertain.

So it's very difficult to to UH to to to kind of make make plans about the future of my entire policy, and these I think the only year kind of a sensible conclusion is that central banks need my semum flexibility to to coop result kind of outcomes, So they need to keep to keep all their options open.

So I mean, because of this sort of extraordinary moment, and you mentioned it, I think in one of your first answers were in an era in which they're sort of a perception but prior also reality that there really is only so much, so many tools at the central bank's disposal. Right now, we have more people talking about, okay, we need more aggressive fiscal policy across the developed world.

Even the I m F has said as such a do you believe um that that is the case, that there is an argument for fiscal authorities to do more? But more importantly, do you think sort of going forward, and even as this crisis hopefully sort of phades into the rear view mirror, do you think it's worth a sort of broader rethink about a more permanent role for UH fiscal policy in terms of macro stabilization, such that we're not really depended on central banks to balance the economy.

Every time, you know, things things go bad, it's there. It's a pity that you would need their global pandemics to to have that discussion, right, I mean, I mean it has started a little bit before, but it does feel as though the pandemic has accelerated the discussion of nothing. Yeah, I mean that there are there are I think the discussion. I mean it it looks different in different places, and

we're thinking there. In the US, you have a very decent tradition of stabilization policies, both on the monetary side and on the fiscal side, and of a good, good complimentarity between monetary policy and fiscal policy, and the economy is flexible and resilient and strong enough that you you can stay in that mode, right, because the economy always comes back, and so you're not stuck in a state of the world where you would have to to do

a very active monetype policy and very active fiscal policy at the same time, because the economy it comes back. Right. It's more difficult in Europe for different reasons, one reason being that we've we've never been able so I say we as a European right, uh now, we've never been able to find the right fiscal framework, and so fiscal policy has never been has never been very helpful in helping the ECB manager cycle, and it's becoming more helpful now.

And you've discussed it with with my former colleague of it or Constanzo, and I agree with with a lot of what what he told you that is now happening, and it's a it's a very good development. But the other reason is that the economy is in Europe is

not nearly as flexible than the US. So if you're into that kind of of extraordinary situation where you need to to turn the dial and and have a very active type policy and fiscal policy at the same time, because the economy is not responding, you don't know how much how how much time it will come to go back to normal, right, because the economy is not facile

bab enough to do it by itself. So that's that's a different situation, which also calls for a little bit of caution, right because you can be stuck there in that kind of in that kind of state of the world for much longer. And so so far, so good. I mean, the what what what fiscal authorities and my entire authorities have done so far is exactly what you were suggesting, And what what you what we want to see that is good complimentarity between my entire policy and

fiscal policy. Even in emerging markets economy is by the way, you are now seeing some I mean many emerging market economies UM doing quee and the government is issuing more domestic depth I mean domestic currency, the nominated depth, which is santral banc and partly buy UM and that's the way to kind of strengthen the complimentarity between my Thai policy and fiscal policy, and that has given them much more policy space. So you're seeing that happening in different places.

The question is what happens if that is that a situation that can last for many years, because then depth public depth will be building up. Private depth will be building up as well. Some of it will be transferred onto the balance sheet of the government UM and at some point, whatever the efforts of the central bank, the depth will be will be will be so high that

you will need some kind of rescheduling or restructuring. UH. And so if if if the situation with the virus states as it is for a number of for another a few years, which of course nobody nobody hopes what today looks like good corporation between moneti policy and fiscal policy and and respectful of everyone's mandate right, not not

harmful to the independence of central banks. That's something that that would become much more difficult to sustain because you will have to start discussions on some some ways to to to share the fiscal burden. And these discussions can be politically very difficult and very harmful. And and it's already starting in the in the developing world. I mean, there is an a discussion on depth restructuring and depth

depth initiatives in the in the developing world. M if we stay there for a few more years, that will gradually come to the developed world, and that will that will come with huge political difficulties. So um, I guess the only conclusion is that you want to you want a vaccine to be found very quickly. That's a conclusion. I think we can all agree with that. Definitely, we

all agree with that. Yeah, you mentioned the interview we did with your former colleague bitour Constantio, and one of the things that came up quite a bit in that conversation was inflation or the lack thereof. Rather than ask you the same question that we ask bitore, which is do central banks understand inflation? I want to ask a slightly different one, which is, why do you think that consumers or the average person's perception of inflation seems to

differ from what central banks are looking at? And I think there's a stat out there that um, according to European Commission Survey, households thought annual inflation was something like nine percent between two thousand four and whereas we all know having this conversation now, that inflation was actually below the two percent target and quite far below it. So where do you think that discrepancy is actually coming from, Well,

it comes from there. The way statisticians and central and central bankers look at inflation is a is very is from a southern feet right. It's a bird's eye view on everything that's going on into the economy across social groups, across age groups, across different places. And it's so it totally kind of ignores the diversity of consumption habits, um and the and also the fact that you buy different

different goods and services at different frequencies over time. So individuals are are biased towards overweighting goods and services that they buy very often like like obviously, I mean food and dairy and and transports and and and refueling your car and that kind of things, while and the price of her of smartphones might be collapsing. I mean, that's not something you buy very often. So when people ask you, come and ask you about inflation, you're not going to

think about that. So there are huge cognitive biases which which are which are just normal, and central banks have not really made the effort to kind of translate their concepts into concepts that people can relate to. And I

think that's a big challenge for the future. That central banks are absolutely right to to look at the economy in the aggregate at a at an aggregate level, but when they when they when they formulate their policies and they're and their targets are in terms of inflation, they've got to translate it in a way that people can understand.

And we're not doing that, you know, Without getting too much into specific actions being taken by major central banks right now, you know, I want to just talk a little bit more about this sort of intellectual landscape, and we see this movement towards um policies or frameworks that seek to avoid past mistakes and the FED is engaging or and now it's the new framework of average inflation targeting UM combined with a sort of more robust forward guidance.

You've done a lot of work on these types of things, uh in your career. Do you see this as evolution average inflation targeting to avoid premature hikes in the future. And do you think there's more that central banks can do with sort of state contingent for for guidance, very clear levels that they set before which they would consider hiking raids or do you think the sort of current or they sort of I guess at the state of the art, so to speak, in terms of what can

be under this tour. Yeah. Look, look, I don't want to I don't want to comment on specific decisions by specific central banks. UM. I mean you can you can

put very sophisticated words and concepts on that. I think at the end of the day, or it's a lot of what is being done today in different places amounts to just making sure that you will have maximum flexibility to cope with with economic uncertainty and as you said, UM, kind of firm tilting the discussion so that you're on the right side of the discussion, and you prefer you don't want to take the risk of having even lower inflation, given that you're at or close to the lower abound

in terms of your interest rates um and and given the the harmful the harmful con sequencers of deflation for the economy, So you want to be in terms of risk management, right, you want to be on the right side of that of that risk. And if you if you're going to take a chance, that would be the chance of higher inflation, because then you know what to do. That's how I understand what they're all saying, right, And then you can put very fancy concepts on it, which

is which is fine. But as long as you as the outcome is that you keep a lot of flexibility and you are on the side of caution in terms of not allowing a deflation to happen, I think that's fine. And I don't think the exact framework matters matters too much, all right, Well, Ben, what I really enjoyed that conversation, and I feel like I actually have a, let's say, the start of a good understanding of central bank digital currencies. You did a really good job of framing the discussion.

So thank you so much. Okay, very good. So I hope now you know why we are why we're doing it, definitely more than before. Thanks. That was great. Thank so. I found that conversation very very interesting, And one thing that I did appreciate was Ben was framing of a lot of these issues or debates not as technological problems, but as political problems or political issues that need to be decided by governments. Yes, I think to me that was like the big takeaway too. So there's obviously the

technological side that's interesting. There are some exciting things that can theoretically follow from the technological innovations, whether it's advances and payments, the ability for people to engage in finance outside of just um sort of interface with commercial banks. But it does feel like these are all sort of the big questions are still have to be fought over politically, how any country actually wants to set these up, and

the parameters of digital currency. Yeah, and I think that's another thing that came through from the conversation, the idea that not every cb d C is going to look the same, and countries might have different things or different problems that they're actually looking to solve when they issue these and for instance, you brought up the discussion about privacy.

There might be certain countries in the world, you know, I don't know, the Cayman Islands, Bermuda, places like that where anonymity of central bank digital money could work and could even be valued. Um, but that might not not necessarily be the case in other parts of the world. Yeah, I mean, I think this is the question of anonymity is super important because look, that is a really important aspect of cash, right, Like people like cash for that reason,

but cash is going away. It's being used less and less because a you know, we have our phones and there's all kinds of sort of digital money infrastructure out in the wild, but also just on the internet, there

is no way to spend cash. And so the question is if there's a if we if we transport sort of the concept of cash to the internet and such that I can pay you for something directly without us having to use a commercial bank, do I get to keep what is a pretty fundamental characteristic of cash, which is that privacy? And if not, I think that's like a potentially sort of a loss and a worrisome thing for sort of civil liberties and rights. If that goes away.

You know, one thing that never ceases to amaze me, and I was thinking about during that conversation is just how many different types of money there actually are. And people say money, but of course, yeah, you know, there's so many variations. There's the sort of commercial back end money that been always talking about a lot um, there's obviously cash, and I don't know, like, I don't know what I'm trying to say, but it's it's just remarkable.

You know. What I think is what I always think about is interesting, is that like when people think of money, like when they think of like a dollar or a euro, I think the first thing that usually comes to mind is the physical version. But I realized what I've like sort of like come to appreciate over the years is the physical version is like the weird freak show thing that doesn't really fit into anything else, so we tend

to they're not the same. And you know, like the physical money, the cash that we have like in our pocket, that's like this like narrow slice of the money system. It doesn't even really make sense. Most money is credit, but it's not it's the direct liability of the central bank.

But that's also strange, because what does it mean to be a liability all the other forms of money, whether it's the money that I have in bank, whether it's the money that I have in penmo, whether it's the money that banks have held at the central bank at the foot of reserve, that all sort of like fits into like this sort of like nice sort of like framework of like credit money that is essentially the core

of the system. And so the money that most people think of is like the weird exception and not the rule at all. Yeah, I think when you think about it that way, the discussions around cd DC make a lot more sense, like why central banks would be trying to solve the problem basically of cash being such a weird thing and serving such a unique role, a unique all be a changing role in society, you know. The

The other thing is, like we talked about privacy. I mean, there are some people who are like really see the privacy aspects of cash to be a super negative. I mean, like, uh, who is it that um can rogue off? I mean he wrote a book basically about how awful cash is, how it facilitates crime and tax evasion and corruption other and stuff. So while there are some people who are like, okay, online digital currencies may solve the problem of anonymous payments

on the internet in the world without cash. Other people will say, like, this is really exciting because we can get rid of cash and then there's no more anonymous payments anymore than we can go against all these ills like drug dealing and money laundering and stuff like that. So some people see this as a huge opportunity to fix what they see is one of the major flaws

of money right now. I mean. Other people argue also that there are less harmful forms of digital cash already in existence, such as gift cards issued by Visa and MasterCard things like that. Um, okay. Well, clearly there's a lot to unpack when it comes to the very nature of money, and we will of course keep talking about it on All Thoughts. It's a perennial favorite of ours. But for now, should we leave it there? Let's save it there. This has been another episode of the All

Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at tre See All the Way, and I'm Joe Wisn't Though. You can follow me at the Stalwart and follow our guest Benay on Twitter he's at B Currey. Follow our producer Laura Carlson. She's at Laura M. Carlton. Follow the Bloomberg had of a podcast francesco Leavi at Francesca Today, and check out all of our podcasts under the handle at podcast Thanks for listening.