Dear all Publish, people 

I have written a policy paper for African Institute for Decentralised Finance and Blockchain (AIDBLOCK) regarding cryptocurrencies and international financial institutions such as the IMF, BiS, and G20. 

At the moment, I am in the process of finalizing a new paper focusing on crypto and public monetary policies regarding central banks, governments, and CBDCs. 

Monetary policy is often explained as actions taken by a central bank or other monetary authority as a government currency board to manage the supply and demand of money and credit in an economy. The monetary policies promote goals and actions of stable economic growth, low inflation, and "full employment." In practice, monetary policy involves using various policy tools and actions, such as adjustments to interest rates, reserve requirements, and open market operations, to influence the level of economic activity and the behavior of financial markets. The specific goals and strategies of monetary policy may vary depending on the nation's or region's economic conditions, political situation, and global development. 

Today, almost all United Nations member states and sovereign nations have a central bank or other monetary authority responsible for implementing monetary policy. The specific details of monetary policy can vary by country, depending on economic conditions and political environment. Some examples of central banks and monetary authorities worldwide include the Federal Reserve in the United States, the European Central Bank in the eurozone, the Bank of Japan in Japan, and the Reserve Bank of India in India. These institutions are crucial in managing their respective economies and ensuring political aims regarding financial stability.

In the aftermath of the global financial crisis during 2008-2009 and the Euro crisis during 2010-2015, major central banks cut policy and interest rates to close to zero or even below zero. Generally, policy rate cuts are an effective tool to stimulate the real economy after severe downturns. The idea is to make lending and crediting easier for private banks, larger companies, and businesses. However, following the introduction of zero and negative rates, many academics and policy experts have raised concerns about its limited effectiveness in stimulating lending and its potential adverse consequences for bank risk-taking and, more generally, for financial stability. Monetary policy also affects bank credit supply via the external-financing constraint. By acting on both deposit and loan rates, a monetary policy cut generates two opposing effects. First, by reducing the required return for outside investors, a policy rate cut makes bank financing cheaper and relaxes the bank's financing constraint. Second, by passing through to the loan rate, the reduction in the policy rate decreases banks' pledgeable return. This, in turn, implies an increase in the cost of external financing for banks, thus constraining their ability to raise external funding and ultimately reducing credit supply.

The strength of the pass-through of the policy rate to the cost of outside funding and the pledgeable return via loan rates determines how the bank credit supply reacts to monetary policy changes. When rates are high in normal times, the pass-through to short-term rates (deposit rates) is stronger than that to long-term ones (loan rates). Hence, the external-financing constraint relaxes, and monetary policy is accommodative. In a low-interest rate environment, the transmission to deposit rates is impaired because there is a zero-lower bound on retail deposit rates. A rate cut then still transmits to lower loan rates but less so to lower deposit rates. As a result, the external-financing constraint relaxes less, and the effectiveness of the policy rate cut weakens to a point, the so-called reversal rate, where the financing constraint tightens, and a rate cut becomes contractionary.

The effect of a policy rate cut on the external financing constraint also plays a central role in bank risk-taking. The contractionary effect of monetary policy on lending and bank risk-taking are closely intertwined. Banks take more risk when the cost of prudent behavior outweighs the benefit. The benefit of prudent behavior is captured by the ability to lend and accrue the intermediation rent. Prudent banks can attract more outside financing, lever up more and obtain

larger profits. Monetary policy affects risk-taking to the extent to which policy rate changes affect how lending reacts to changes in banks' screening efforts. When a policy rate cut makes it more difficult to expand lending, banks find screening borrowers less attractive. This implies that when the policy rate falls below the reversal rate, a policy rate cut leads to increased risk-taking. However, monetary policy may also induce increased risk-taking when there is still a significant pass-through to deposit rates, which is still expansionary. This is more likely to occur when banks have market power since a change in the lending volume reduces the loan rate, thus further reducing the benefit from screening.

Monetary policy also affects bank credit supply by changing banks' equity multiplier. There are two effects. First, a policy-rate cut makes outside funding cheaper. This decreases the extent to which loans are not self-financing, relaxes the external-financing constraint, and increases the equity multiplier. Second, a policy-rate cut reduces loan rates, decreasing the pledgeable return. This increases the extent to which loans are not self-financing, tightens the external-financing constraint, and decreases the equity multiplier. The strength of these two opposing effects determines how much a policy-rate cut is accommodative and increases bank credit supply and vice versa for a rate hike.

The key factor in our transmission model is the strength of the pass-through of the policy rate to the cost of outside funding and the pledgeable return via loan rates. The pass-through's strength determines the extent to which loans are not self-financing, and therefore also, the equity multiplier and bank leverage react to a change in the policy rate. In normal times, when interest rates are high, the pass-through of a lower policy rate to the cost of funding is stronger than the pass-through to loan rates. This is intuitive because banks perform intermediation between short-term funding and long-term loans. Instead, the opposite occurs in a low interest-rate environment, possibly with negative policy rates. When this happens, a policy rate cut increases bank credit supply less. When the pass-through to banks' cost of funding is sufficiently weak, then reversal occurs – a policy-rate cut then decreases bank credit supply.

A change in the policy rate affects bank risk-taking because the policy rate affects the external-financing constraint and, hence, changes the sensitivity of lending concerning screening. The policy rate does not change the per-loan rent the bank earns. The rent compensates the bank for retaining an illiquid loan, i.e., once the loan has been made, and retention of loans does not depend on the policy rate. A policy-rate cut increases risk-taking in a low-rate environment because monetary policy has less accommodative or contractionary lending effects. In a low-rate environment, banks take more risk, and consequently, the banking sector becomes more fragile. The framework is built on the idea of an external-financing constraint, which arises due to an agency problem between banks and their outside investors. This constraint creates a difference between the internal rate on capital and the market rate, which causes banks' net interest margins to overstate the profitability of bank intermediation.

In the following articles, I am going to write about it. If you would like to know any extra info about how crypto can compete with or even lead to abolishing central banks, you can email me via [email protected] or  [email protected]  or ask me for Discord, Telegram, Whats App or other apps that you prefer. 

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