Sunday, August 15, 2010

My column on VoxEU.org

I recently wrote a column for VoxEU.org. It can be found here.

Honestly, the editing made it far better than it was originally, and for that I thank Dr. Richard Baldwin, Founder & Editor-in-Chief of Vox.

In its own words, VoxEU.org is “a policy portal set up by the Centre for Economic Policy Research (www.CEPR.org) in conjunction with a consortium of national sites. Vox aims to promote research-based policy analysis and commentary by leading scholars. The intended audience is economists in governments, international organisations, academia and the private sector as well as journalists specializing in economics, finance and business. Assistance for the Centre's work on Vox has been provided by the European Union, through its programme of support for bodies active at the European level in the field of active European citizenship.”

5 comments:

  1. " all reserve nations must agree to protect against using foreign currencies as an alternative means of exchange".

    sounds very much like the bretton woods system and the london gold pool.

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  2. One can say that but the concern here is restricted to the possibility that, in the event of domestic currency notes of adequate denomination, people may prefer foreign currency notes, especially those of reserve currency nations, as a medium of exchange and store of value. This would dilute the environment required for NNIR considerably.

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  3. Hi, I have read your article and found it quite enlightening. However I wondered whether you and Willem Buiter are right by stating that "taxing currency holdings is too administratively cumbersome". Couldn't a simple tax on ATM withdrawals for consumers accompanied by a corresponding tax on earning withdrawals for businesses do the trick? This seems to me much easier to implement than a currency reform.

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  4. If you read Willem's paper on the subject, you will find a detailed explanation on why taxing currency holdings is cumbersome.

    Your suggestion taxes withdrawals, which isn't necessarily the same as taxing holding. One has to remember that while currency exists, banking is voluntary. It works only when the cost-benefit relationship is in the customer's favor and changes in that relationship will change their behavior as well.

    As things stand, consumers are willing to deposit their currency as they know that

    1) they can withdraw it at any time without any cost and
    2) costs are still in favor of depositing rather than holding currency. Depositing still preserves value, reduces storage costs and allows for ease in transfer.

    If any if these changes, consumer behavior will too. One of the hurdles to NNIR is consumers' ability to hold currency. If depositing currency in banks reduces its nominal value over time, either through a steady negative interest rate or through a one time tax on withdrawal, consumer's may refuse to deposit their cash in banks.

    Your suggestion would work if the consumer withdrawing the cash would continue to hold it as well. That is seldom the case. The consumer may spend it, and receivers may not deposit it if they know they will be taxed if they need to withdraw. Worse still, if it is accompanied by a earnings withdrawal tax, they may not account for the transaction at all, resulting in more of the economy "dropping out".

    Your approach the issue from the belief that if withdrawals are taxed, money will stay in banks. I would imagine a situation where it will be withdrawn but not deposited again.

    This would put the incidence of tax on those who are paid exclusively through bank transfers. Those who transact in currency will have a way of circumventing it. A parallel economy may develop and hurt existing tax collections as well.

    Also, taxation is a fiscal matter and not monetary. One can assume that elected officials are capable of taking unpleasant decisions, but reality points to the opposite.

    Demonetizing high denomination currency is fairly easy to undertake as well. It will result in significant social benefits and the law-abiding section of society would welcome it, despite increased inconvenience. It would shrink the size of the currency based economy rather than increase it.

    I hope I have answered your question satisfactorily. Thanks for reading and your kind words.

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  5. hay sir
    i want to know about the policy implication of of foreign exchange rate at present time period in india

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