New Moneys in the Digital Era

Daniel Sanches of Philadelphia Fed in this article looks at both traditional and new forms of monies:

Cryptocurrencies have become enormously popular, triggering a public debate about if and how they should be regulated. Although these private payment instruments are new, we can use standard monetary theory to make sense of them. This article explores the problems created by both traditional and digital monies, and the solutions that have been adopted through years of trial and error. Even if cryptocurrencies are destined to play an important role in a new, all-digital monetary system, this transition will inevitably be slow and bumpy, requiring both experimentation and prudence.

What comes first? Green deposits or Green finance/loans?

Ever since the Bank of England’s 2014 papers on banking have been released, one is asking this question constantly: what comes first, loans or deposits?  After all for a long time, textbooks taught us that deposits create loans. Banks first get deposits and then intermediate these deposits as loans.

The Bank of England papers not just questioned this long-standing wisdom but turned it on its head. The papers argued that banks give loans first which then come back to the bank as deposits.  The banks were passive creators of money in “deposits first” approach whereas they were active creators of money in the “loans first” approach. Concepts like money multiplier were important in the”deposits first” approach whereas multipliers were not important in the “loans first” approach.

How does one figure around this monetary economics version of chicken and egg problem? One way to do it is to go back to historical records of banks and see what was done. Now there are historical records of quite a few banks but they look at institutional history. What we need is a detailed account on how the bank branches functioned. Did they wait for deposits? Or they just waited for a borrower?

There is one way we can get some understanding of this chicken-egg problem: Green finance. Under green finance, banks are being nudged to make their bank green which means all the financing activities have to go towards greening the economy.

RBI released guidelines on green deposits recently. The guidelines defined green deposits and green finance as follows:

Praying for Rain

José-Antonio Espín-Sánchez, Salvador Gil-Guirado & Nicholas Ryan in this paper study link between religion and rain:

We study the climate as a determinant of religious belief. People believe in the divine when religious authorities (the “church”) can credibly intervene in nature on their behalf. We present a model in which nature sets the pattern of rainfall over time and the church chooses when optimally to pray in order to persuade people that it has caused the rain.

We present evidence from prayers for rain in Murcia, Spain that the church follows such an optimal policy and that its prayers therefore predict rainfall. In our model, praying for rain can only persuade people to believe if the hazard of rainfall during a dry spell is increasing over time, so that the probability of rainfall is highest when people most want rain.

We test this prediction in an original data set of whether ethnic groups around the world traditionally prayed for rain. We find that prayer for rain is more likely among ethnic groups dependent on intensive agriculture for subsistence and that ethnic groups facing an increasing rainfall hazard are 53% more likely to pray for rain, consistent with our model. We interpret these findings as evidence for the instrumentality of religious belief.