| Title | Breaking the Trilemma: Seigniorage, Endogenous Remittances, and Digital Currency |
| Date | July 15, 2024 (Monday) 10:40-12:10 |
| Location | 12th Floor Discussion Room (Building 3) |
| Abstract | Central banks operating under exchange rate pegs and free capital flows lack the autonomy to set policy rates. We show this constraint is not absolute when financial assets and central bank reserves are not perfectly substitutable. Incorporating the central bank balance sheet and digital payment flows in a small open economy model with a dollar peg, we track the central bank's profit rebate to the fiscal authority. We find that, despite large US rate hikes, the central bank can uphold the peg by moderately adjusting profit rebates without changing policy rates, because profit rebate changes drive a wedge between policy rates and nominal returns of financial assets. We solve the profit rebate endogenously and explore how a central bank digital currency can facilitate its implementation. |
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