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Macro-economic Management in an Electronic Credit/Financial System

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  • Joseph E. Stiglitz

Abstract

Modern technology provides the basis of an efficient low-cost electronic payments as an alternative to the current system where fiat money is the medium of exchange. This paper explores possible macro-economic implication, showing how such a financial system might enhance government’s ability to control the level of aggregate demand. As in other arenas, in second-best situations with uncertainty, systems where there is an attempt to directly control quantities directly may perform better (e.g. have less volatility) than those using prices and other indirect control mechanisms. The paper identifies conditions under which in a system of electronic money, macroeconomic variability is lower when the level and direction of credit creation is directly controlled, through appropriately designed credit auctions, than in a system of indirect control of, say, investment via the interest rate. This is especially important since much macro-economic instability is associated with instability in credit creation and in the fraction allocated to newly produced goods and services. The paper also explains how, in an open economy, in a system of electronic money, credit auctions combined with trade chits might enable the control of net exports, again enhancing macro-stability. Finally, we explain how under a system of electronic money, the rents that are currently associated with credit creation and that arise from bank franchises—that constitute a form of appropriation of the returns from trust in the government and its ability and willingness to bail-out banks in the event of a crisis or bank run—could be appropriated by the government to a greater degree than at present.

Suggested Citation

  • Joseph E. Stiglitz, 2017. "Macro-economic Management in an Electronic Credit/Financial System," NBER Working Papers 23032, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23032
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    References listed on IDEAS

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    1. Joseph E. Stiglitz, 2015. "New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part I. The Wealth Residual," NBER Working Papers 21189, National Bureau of Economic Research, Inc.
    2. Olivier Jeanne & Anton Korinek, 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," NBER Working Papers 16377, National Bureau of Economic Research, Inc.
    3. Dasgupta, Partha & Stiglitz, Joseph E, 1977. "Tariffs vs . Quotas as Revenue Raising Devices under Uncertainty," American Economic Review, American Economic Association, vol. 67(5), pages 975-981, December.
    4. George A. Akerlof & Olivier Blanchard & David Romer & Joseph E. Stiglitz (ed.), 2014. "What Have We Learned? Macroeconomic Policy After the Crisis," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262027348, January.
    5. Galbraith, James K., 2012. "Inequality and Instability: A Study of the World Economy Just Before the Great Crisis," OUP Catalogue, Oxford University Press, number 9780199855650.
    6. Joseph E. Stiglitz, 2015. "New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part II: Equilibrium Wealth Distributions," NBER Working Papers 21190, National Bureau of Economic Research, Inc.
    7. Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 229-264.
    8. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
    9. Gatti, Domenico Delli & Gallegati, Mauro & Greenwald, Bruce C. & Russo, Alberto & Stiglitz, Joseph E., 2012. "Mobility constraints, productivity trends, and extended crises," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 375-393.
    10. Martin L. Weitzman, 1974. "Prices vs. Quantities," Review of Economic Studies, Oxford University Press, vol. 41(4), pages 477-491.
    11. Joseph E. Stiglitz, 2015. "New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part IV: Land and Credit," NBER Working Papers 21192, National Bureau of Economic Research, Inc.
    12. Adair Turner, 2015. "Between Debt and the Devil: Money, Credit, and Fixing Global Finance," Economics Books, Princeton University Press, edition 1, number 10546.
    13. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 1, pages 35-54, November.
    14. George A. Akerlof & Robert J. Shiller, 2015. "Phishing for Phools: The Economics of Manipulation and Deception," Economics Books, Princeton University Press, edition 1, number 10534.
    15. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    16. Joseph E. Stiglitz, 2015. "New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part III: Life Cycle Savings vs. Inherited Savings," NBER Working Papers 21191, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls

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