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Money, Banking, and Financial Markets
A recent Wall Street Journal editorial highlighted the stiff competition for the “dumbest economic policy” proposed during the current U.S. Presidential campaign. High on the list are tariffs, food price controls, and opposition to the acquisition of U.S. Steel by a Japanese firm. We suggest adding to this list the recent proposals to establish a national stockpile, or even a strategic reserve, of Bitcoin. Rather than accumulating Bitcoin, we urge policymakers to quickly sell whatever they have or receive.
In the past, we argued that, rather than elaborating a regulatory framework that helps legitimize crypto, authorities should simply let it burn (see here and here). However, now that the SEC has granted U.S. asset managers the authority to offer spot Bitcoin exchange-traded products (ETPs) and the Europeans have a articulated a full set of rules (MiCA), it is no longer feasible for authorities to simply ignore crypto. Even so, the fact that we now need to regulate crypto is surely not a justification for the U.S. government to hoard Bitcoin.
When it comes to central bank communication, we have a simple guiding principle: the financial system and the real economy should respond to data, not to policymakers.
Monetary policymakers cannot reduce uncertainty associated with things like evolving technology, natural disasters, wars, changing preferences, fiscal surprises and the like. However, they can avoid adding to these fundamental sources of uncertainty by communicating clearly in advance how they will react to unexpected events. Put another way, central bankers can best achieve their inflation and economic objectives if policy is largely systematic and everyone understands their reaction function.
Ideally, this means that policymakers’ public statements will have an impact on financial markets and conditions only when they contain information about either the reaction function itself or about policymakers’ updated assessment of economic conditions. It also means that the reaction function should be stable most of the time, so that observers do not need to wait for a central bank to act to understand how monetary policy will respond to shocks.