The Impact of the Liquidity Coverage Ratio (LCR) on the Implementation of Monetary Policy
This paper analyses the impact of the short‐term component of the new Basel III liquidity standards, namely the liquidity coverage ratio (LCR), on the implementation of monetary policy in the euro area. It employs a conceptual framework to investigate the interaction between the money market and monetary policy implementation. Based thereon, it argues that the isolated focus on the impact on the LCR tends to underestimate the future challenges to monetary policy implementation for two reasons: first, feedback and network dynamics exacerbate the impact of the standard; second, the ongoing crisis itself challenges monetary policy implementation in the euro area by its impact on the (perceived) arbitrage relationship between open market operations and the unsecured money market. The paper concludes by discussing potential policy reactions concerning both, the calibration of the LCR and the framework for monetary policy implementation.
The Political Economy of Institutional Change in the Payment System and Monetary Policy
Innovations in payment systems are often framed as technological innovations that are exogenous to the institutions and dynamics of the payment system. This paper suggests that the main drivers of institutional change in the payment system are politico-economic factors and the demand of commercial banks and final customers rather than technological innovations. The development and adoption of specific payments technologies are endogenous to the politico-economic tensions that drive institutional change in the payments system. Based on this politico-economic conceptual framework, I investigate the impact of recent innovations in payment systems on monetary policy. The main results of the paper are the following: first, central banks will retain their monopoly to issue the generally accepted medium of exchange with its incidental functions as the uniform unit of account and the medium of final settlement at zero marginal cost. Monetary policy will remain effective, in principle. Second, the question whether central banks will survive innovations is one of political economy rather than one of technology diffusion, that is, it is one of the ability to present their case to the respective legislature relative to the respective capabilities of banks and their final customers.
Did Genoa and Venice Kick a Financial Revolution in the Quattrocento?
Did the city-states of Genoa and Venice kick a financial revolution all the way back in the Quattrocento, much sooner than the financial revolutions of the Netherlands, England and America? To answer this question we analyze the classic revolutions in terms of three key criteria: credibility of debtor’s promises, the role of national banks in facilitating the development of financial markets, and the extent and depth of financial and monetary innovations. We then compare the record of Genoa and Venice with the benchmark from the three classic financial revolutions. The upshot is that the two maritime city-states had developed many of the features that were to be found later on in the Netherlands, England and the United States. The importance of Genoa and Venice as financial innovators has been eclipsed by the fact that these two city-states did not survive politically. Instead, the innovations were absorbed in the long chain of financial evolution and, in the process, lost the identity of their creators.