Gianluca Benigno on Central Bank Balance Sheets, Stablecoins, and Nonlinear Inflation

Gianluca Benigno is a professor of economics at the University of Lausanne. Previously, he was a senior economist at the Federal Reserve Bank of New York and an economist at the Bank of England. Gianluca returns to the program to discuss financial r-star, the changing landscape of central bank balance sheets, the unique challenges facing the Swiss National Bank, how stablecoins could affect Treasury markets and the demand for reserves, the return of nonlinear inflation, its implications for monetary policy, and much more.

Subscribe to David's Substack: Macroeconomic Policy Nexus

Read the full episode transcript:

This episode was recorded on June 22nd, 2026

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us.

Our guest today is Gianluca Benigno. Gianluca is a professor of economics at the University of Lausanne and formerly was a senior economist at the Federal Reserve Bank of New York and also worked as an economist at the Bank of England. Gianluca joins us today to discuss central bank balance sheets, stablecoins and their implications for balance sheets, and the current debate over inflation and why it will not come down. Gianluca, welcome back to the podcast.

Gianluca Benigno: Thank you, David. It’s a pleasure, of course, to join your podcast and looking forward to our conversation.

Beckworth: Yes, thanks for coming back on. For those who have listened for a long time, you may remember Gianluca’s previous appearance. Back in 2023, we talked about a number of interesting topics, including the financial resource curse, the dollar’s imperial cycle, and financial r-star, or what you call “r-double-star.” On that last point, financial r-star, because that is still a topic today, is the Fed neutral or not? Maybe give us a quick update. Where does your really innovative and cool measure financial r-star stand? Any updates to it?

R-Double-Star

Benigno: Thank you for asking again about r-double-star. I think it’s an important concept in policymaking because that is a concept that defines the extent to which monetary policy can trigger potentially financial stress in the economy. The idea of r-double-star is to map into interest rate spaces stress that arises in the financial side in the economy so that monetary policy has a reference benchmark rate beyond which, or going too high, might generate stress in the financial system. That’s the concept of r-double-star.

It’s a concept that is different from the natural rate of interest that is many times referred in policymaking as a reference rate to define the stance of monetary policy, because this speaks to financial stability rather than macroeconomic stability. We are working on this with my former colleagues in the Fed system in New York and Washington.

We are updating the model to make it even more relevant in terms of thinking about policy issues, so enriching it relative to the previous version, and also to provide more updates and refine estimates. We’ve been working on it. Hopefully, by the end of the summer, we should have a substantial update and built up measures that provide early empirical estimates for this concept.

Beckworth: Are you going to be publishing regular updates to it, kind of like Laubach-Williams r-star? There’ll be the Benigno r-double-star? Are you going to have that available?

Benigno: With my colleagues, Ozge Akinci, Marco Del Negro, and Albert Queralto, hopefully, we will do it from the Fed point of view. It requires a lot of work. Maybe I can do something by myself, less official, that can be hopefully useful in terms of thinking about what happens in the economy when interest rates rise and eventually, when debt generates financial stress, or potentially, we get closer to regional financial stress.

Central Bank Balance Sheets

Beckworth: Okay. We’ll look forward to those updates. Let’s talk about central bank balance sheets. Now, listeners and watchers of this podcast know we talk about that a lot here. Some of them might get tired of me talking about central bank balance sheets, but it’s something that’s really topical right now. A lot of advanced economies for banks are rethinking how they do the implementation of monetary policy, which ties into the size of the balance sheet.

As you know, Gianluca, there’s been this big movement toward demand-driven operating systems. The ECB has a demand-driven floor system. The Bank of England, something similar. Reserve Bank of Australia, they’re all going toward a more demand-driven system where banks in the long run determine the level of reserves or settlement balances in the system. They’re doing this in part to let the market drive the size of the balance sheet. Also, some of them want to resurrect interbank lending. It’s a real important topic.

It seems like the Federal Reserve now is joining this conversation. The new Fed chair seems interested in rethinking options. Even people at the Fed who are advocates of ample reserves are open to shrinking the size as long as you keep the spreads. As long as you keep interest on reserves close to overnight rates, they’re talking about shifting the demand curve in. There’s a lot of interesting developments happening now. What is your overall sense of the conversation around central bank balance sheets?

Benigno: I think you made yourself also a very interesting contribution to this debate.

Beckworth: Well, thank you.

Benigno: I invite people to read them and they’re very comprehensive in terms of the overall discussion on different options in terms of thinking about the balance sheet. Going back to the point that I raised earlier, to me, of course, there is specificity in each economy that might justify one approach versus another. One dimension of it is evident, for example, in the United States because, as far as I’m aware, that’s the only institution that has an ONRP facility, and other central banks do not have something comparable on their liability.

There is specificity in the context of the US economy that might justify a different way of thinking about the balance sheet and the size of the balance sheet relative to other countries. My overall take on this from a broad perspective is that this debate has focused a lot on the demand of reserve side for determining the size of the balance sheet. You also have a recent post in which you discuss this aspect and connect it with the Friedman rule.

I think that’s one dimension of the problem. It’s complementary to the other aspect that needs to be taken into account. I think Steve Miran has been pushing the regulatory angle. I think that’s very important. Those are combined. Of course, they’re not disentangled, but that’s important. Also, in my opinion, that also needs to be connected more generally, also in terms of thinking about the supply of safe asset or liquid asset that comes also from the fiscal side. That adds another dimension to the way of thinking about balance sheets.

Current debates focus a lot on one particular aspect, in my opinion, but it’s a very complex discussion. I’m glad that the new chairman is putting forward a task force on it because it requires a deep understanding of not just demand of reserves coming from the banking sector but also the interplay of these demands. With a regulatory framework and also with more general macroeconomic framework that in the specificity of the balance sheet is also related to fiscal policy and the supply of Treasury in the United States.

Beckworth: Those are all great points, Gianluca. You’re right. It’s a complicated issue. Each country is different. Each country has got to deal with different regulations, a different market structure. The euro area is dominated by banks. The US is a mix of banks and money markets and hedge funds. How you get liquidity dispersed through the economy is contingent. Those are great points. 

Now, you have written a piece in your Substack newsletter. By the way, folks, you need to subscribe to Gianluca’s Substack, and it’s called The Central Banks’ Watcher. Is that correct? Is that the title?

Benigno: That’s correct. Thank you.

Swiss National Bank

Beckworth: Yes. I subscribe. It’s a great newsletter. Gianluca shares his wisdom with the rest of the world. He wrote a piece that really motivated me reaching out to Gianluca, and it’s about the Swiss National Bank’s balance sheet. This is a great example of what you just said. It is a very unique country with a very unique balance sheet. I guess you could say many small open economies share some of the challenges and characteristics.

We think of the Fed’s balance sheet, the ECB’s balance sheet, and we look at the asset sides, we typically think of loans, or we think of government securities or bonds they’ve purchased. You have this really stark picture right out the gate on your post that shows that most of the assets, literally most of the assets, are foreign currency investments of some kind or investments in foreign currency.

It’s a very different story than for most advanced economy central banks, unless they’re small and open. I know the central bank of Norway, they have a lot of foreign exchange on their balance sheet, the Riksbank. The Swiss National Bank, it’s so fascinating, and you tell such a fascinating story about it. Go ahead and maybe describe to us the Swiss National Bank and what’s unique about its balance sheet, both on the liability side and on the asset side.

Benigno: Well, yes. This investigation on the central bank balance sheet—and my piece actually was the byproduct of an interview that I had with a journalist in Switzerland that asked me to comment on FX intervention in Switzerland, motivated by recent tension with the US Treasury related to imbalances and the fact that there is a lot of intervention done in Switzerland in order to mitigate the appreciation of the Swiss franc.

Indeed, that is the key feature that characterizes Switzerland. It’s not a commodity exporter country like Norway, as you mentioned earlier, but it’s a country that has a currency, the Swiss franc, that becomes very attractive, especially in a situation of high uncertainty or geopolitical tensions, situations that we have witnessed in the past years.

This appreciation, of course, is unwelcome from the central bank point of view because they generate deflationary pressures coming from import prices. As the Swiss franc appreciates, import prices tend to decline and that leads to pressure on inflation on the downside. Switzerland has been experiencing this for a long time, and even now inflation is flirting with 0%, but still within the target, which is a band between 0% and 2% that the Swiss National Bank set in terms of achieving its price stability objective.

What happens is that in order to mitigate this appreciation, the central bank intervenes in the foreign exchange market and buys foreign assets, broadly defined, and at the same time, it creates reserves that in Switzerland are called “sight deposits.” That’s the equivalent of reserves at the Fed. Mechanically, it’s an open market operation, like the Fed doing QE, that expands the balance sheet on the asset side and the liability side.

The interesting aspect of it is that this expansion creates also a classic currency mismatch because you have assets that are in different currencies, mainly euro and US dollar, and the liabilities that are mainly Swiss franc. That is an important asymmetry that characterizes the balance sheet of the Swiss National Bank that is uncommon to many advanced central banks. This is something that you don’t see at the Federal Reserve; you don’t have it at the Bank of England or at the ECB. That’s a kind of mismatch.

Why this is interesting? This is interesting because, of course, every time currency moves, there are valuation effects that affect, from the perspective of the Swiss National Bank, the value of its asset. When the Swiss franc appreciates, that tends to worsen the value of the asset side of the Swiss National Bank balance sheet. These kinds of movements have implication for fiscal policy broadly defined because what the central bank does is that through various rules that, of course, depends on the profits that they make, they transfer part of their profits to the confederation in the canton.

When there are no profits, there’s nothing that goes to these entities. When there are profits, depending on how big the profits are, then this money gets transferred to the canton in the confederation. For example, if I’m not mistaken, last year, there were 4 billion Swiss franc that were transferred, but in 2022 and 2023, I think that amount was effectively zero.

Now, what is interesting also about all this is the following, is that from the perspective of the Swiss National Bank, you think about it, it’s actually very difficult to shrink the balance sheet. At the same time, as the balance sheet increases, you become more exposed to currency fluctuation. The bigger the gross position, the bigger are the effects of a 1% appreciation or a 1% depreciation on the profits because of the currency mismatch.

Effectively, you end up in what I refer to a fiscal scale trap because the bigger the size of the balance sheet, the bigger the gross position, the bigger the valuation effects linked to currency movements, and the bigger the effects on the fiscal side in time of transfer that the Swiss National Bank does to the confederation and the cantons.

That’s the summary of what happens at the level of the Swiss National Bank. There is a trap that comes from the asset side, the currency mismatch, that is very similar to what you describe in one of your posts when you talk about Rajan, inside, in terms of more QE generates more reserve demand.

You have a similar mechanism that is different economic logic, but from the Swiss National Bank point of view, you have a trap that comes from the asset side because of the currency mismatch while many other advanced economy or the specificity of the US through regulatory constraint, you have a trap that comes from the liability side and the fact that by expanding or increasing the balance sheet of the Fed, you create deposits at the level of the banking sector that requires more reserves, so making it more difficult to shrink the balance sheet. That’s a similar trap.

Beckworth: We have a ratchet effect, which you call the fiscal scale trap. Just to walk through that again to summarize what you said is most of what the Swiss National Bank will buy up and it’s tied to the valuation, the change effects, the value of the currency relative to other currencies because Switzerland’s a small open economy and import prices really do matter. It steps in and it buys up these other foreign-denominated assets.

The asset side of its balance sheet is largely in other currencies—the euro, the dollar, you mentioned mainly. Then the liability sides, of course, are all domestic currency. They’re all in this domestic Swiss currency. You have a currency mismatch as you mentioned. Let’s take this a step at a time. When the Swiss National Bank intervenes and it buys up foreign currency, it takes those currencies, does it just sit on the currency or does it go buy foreign bonds, foreign equities? What does it do with the investments it owns?

Benigno: They buy different assets and they have on their balance sheet different assets. Among some of the assets that they have, they have US equities actually. We don’t know exactly the composition or the granularity of all these assets, but for example, you can infer that by looking at regulatory, the SEC in the United States because depending on the amount of share of Apple, for example, that you have, you need to report it.

To the extent to which you are a big shareholder, you can infer it from the US side rather than from the balance sheet of the S&P. They have equities. They have bonds in Europe and in the United States. I don’t know the details of that because I haven’t looked carefully at it.

Beckworth: Sure.

Benigno: It’s not something that they have publicly available. They release a composition in terms of currency, if I’m not mistaken, and possibly also composition in terms of type of asset but I’m not 100% sure.

Beckworth: They are buying equity. The point is they do buy equities. They do buy stocks, which is, for many central banks, very unorthodox on the asset side to buy up equity. The Bank of Japan has ETFs, I believe, that are—

Benigno: Exactly.

Beckworth: —tied to equity. You could argue one benefit of doing that is even though there might be valuation changes, so the value of those assets go down as your currency goes up. The flip side is maybe those equities are actually earning some return. There’s some cushion. The equities themselves may grow in value. Even though you have a foreign exchange valuation effect, maybe it softens the blow, the loss on the asset side.

I remember someone from the Bank of Japan told me that. I saw a former leader from the Bank of Japan, and I asked him about all their equity holdings. He goes, “Well, hey, look at us. We’re not suffering the same type of losses that you are at the Fed.” I was like, “Okay, very interesting argument.” All right. The Swiss National Bank is buying up these foreign assets. 

I’m going to throw a number out to make this concrete. This number you had as of April, when your post came out, they have a total of $894 billion assets. Of that, the foreign currency investment is $759 billion. That’s almost most of it, just about $100 billion less than the total amount. The graph that you show, it’s a very striking visual. There’s two lines, total assets and foreign currency investments, and they’re pretty close to each other. You have these big swings. Again, the story you’re telling is that when the Swiss currency, the franc, appreciates too much, the Swiss National Bank has to step in, intervene, try to offset that because it, again, affects import prices. That intervening requires the Swiss National Bank to go buy up more foreign assets.

Benigno: Exactly. Exactly.

Beckworth: Then to do that, it has to expand the liability side. It’s just this vicious cycle, and it’s a ratcheting effect. As you note in your post, there’s two ways the Swiss National Bank can respond to inflation. If it’s the valuation effect, which therefore affects how much inflation gets imported, it’s really operating on the asset side of its balance sheet. It’s buying up these foreign assets. If it’s domestic inflation, it can adjust its interest rate too, which then affects the cost and duration of liabilities. You mentioned there’s a possibility you could have a double whammy. You could have both of them—

Benigno: Exactly.

Beckworth: —go in the wrong direction, so massive losses. Here’s my question, Gianluca. There’s the potential for large operating losses. You mentioned ’22, they had losses. In general, they’re not suffering operating losses, are they?

Benigno: Well, if I’m not mistaken, they did in a couple of years. It can happen, but on average, they’ve been profitable business in terms of also the effect that you notice. I emphasize the currency valuation effect, but there is a return coming from equity and also appreciation of equity that can counterbalance the currency effect. That’s important. Yes.

That particular situation in which they had big losses was the year in which they had to raise interest rates because inflation was picking up, not at the level seen in other countries, but in Switzerland. Where I live, inflation above 2%, 3% is an exception. That’s very unusual. The other aspect, what they did during the post-COVID inflation is that also they sold foreign currency investment to appreciate the Swiss franc because there was also a channel through which they controlled imported inflation, which was at the core of the inflation dynamics in the post-COVID environment coming from supply chain disruption. This is the other work I’ve been doing.

They did appreciate the Swiss franc and, at the same time, also increase the cost of liability by raising the nominal interest rate, as you said, because that is the other side of the balance sheet that also matters for the net profits of the Swiss National Bank. That is a double-whammy situation exactly in the post-COVID inflationary period. That was interesting.

Also, in that post, I emphasize another aspect that is very relevant for thinking about balance sheets but also policy in general, monetary policy. The Swiss National Bank is relatively unusual, I would say, but at the same time, very practical in terms of thinking about monetary policy, not just in terms of the domestic interest rate but also in terms of FX intervention because they acknowledge the importance of the imported inflation for overall inflation.

I had this matrix in which I was discussing policy options along these two dimensions—interest rate and FX intervention—for determining which side of the balance sheet of the central bank is mostly affected. When it’s domestic inflation, you operate mainly through nominal interest rate, and then it’s the liability side of the domestic central bank that is affected.

Otherwise, imported inflation requires more FX intervention from a policy tool point of view, and that tends to affect most the asset side. There is an interesting implication coming from the use of the policy mix, conditional on the shock, that indeed affects profitability and eventually, which is important here, the fiscal side as well.

Beckworth: Yes. Very fascinating case where the central bank has to be very nimble, very alert to what’s happening, both the domestic inflation and imported inflation. If all the stars align perfectly, it could be a win-win, but it could also be a loss-loss if it’s a double whammy. If they have to tighten, like you said, in ’21, ’22, because of the supply disruption, because of demand-side-driven inflation as well, but also because the franc appreciated during that time.

Super fascinating. It just sheds light on how complicated things can be and how unique they can be to each different country. Now, one last question on the Swiss National Bank’s balance sheet. You have a discussion of a policy proposal, which ties into the fiscal side as well. Maybe talk us through that. What’s being discussed in terms of how they distribute profits? Maybe describe how they distribute profits now, what this new proposal would do.

Benigno: Well, currently, all the distribution of profits is conditional around the existence of profits effectively. There is a rule that the term meets the amount based on the size of profits. I think it’s $1 billion approximately. I write it more precisely in the blog. It’s $1 billion every $5 billion of profits up to a limit of $6 billion per year.

There are years in which this money didn’t go to cantons and the confederation. That, of course, creates problems at that level from a fiscal point of view because there is a rationalization of resources that comes from lack of transfer as they were used to having regular transfers earlier. Some colleagues in Switzerland that are part of the observatory of the Swiss National Bank, they produced very interesting pieces that address policy issues for the Swiss National Bank.

They discussed how to amend because this is the time in which there is a discussion in terms of a possible revision of this rule, how to amend this, and they suggested the possibility of tying a fixed percentage amount based on the size of the balance sheet. It doesn’t matter if you have profits or not. To the extent to which you will have losses, those will affect the equity of the Swiss National Bank, but you’re still going to have a transfer every year.

They suggest a 0.5%, if I’m not mistaken, of the overall size of the balance sheet, and that will be a constant flow, so more predictable, and can create, of course, less problems from the cantons and the confederation point of view, which is important. I think the idea of smoothing is relevant. Of course, the incentive that comes from a broad point of view is that the larger the balance sheet of the SNB, the better it is in terms of fiscal transfer. 

Beckworth: As long as it’s profitable. 

Benigno: No, it doesn’t matter. 

Beckworth: In the long run. I mean, in the long run.

Benigno: In the long run, yes, of course, you need to have a situation in which you don’t eventually deplete equity.

Beckworth: It sounds like the Swiss National Bank doesn’t typically have an operating loss because its asset side is diversified. That’s what’s unique about it. It’s not just that it’s a foreign currency base, but it’s got equity. It’s got bonds. It’s got all these other things that can diversify and cushion its earnings.

Typically, it’s going to be profitable. Over the long run, it can afford to have what you call a smoothing approach to these payouts to the cantons, to the local districts. That’s really fascinating. Now, Gianluca, one last question on this. It pays the funds directly to the cantons, to the regional governments?

Benigno: Yes, my understanding is that there is a direct transfer as such.

Beckworth: It doesn’t go to a central government; it goes to the regional ones. That’s interesting.

Benigno: Yes. I don’t remember now the exact allocation, how it is split. There is a rule for that, but that goes to cantons and the whole confederation as a whole.

Beckworth: Okay. It will be interesting to see how this unfolds. If this plan does pass, does it change incentives? Is there now an incentive to make the balance sheet bigger and bigger and bigger? Would that have any kind of consequences?

Benigno: The SNB, they are very careful in terms of thinking about the investment side. I think they have a very neutral way through which all this is allocated. They are not in the business of optimizing return. Also, from their point of view, they act with the objective of price stability. FX intervention is very much conditioned on that.

Beckworth: Okay. They’re independent. They’re not going to be pressured. 

Benigno: No, they are very independent. I think, actually, as a watcher of all these central banks, I have to say they’re probably the most successful in terms of taming inflation in the post-COVID experience episode. And they are very practical, as I said, in terms of acknowledging the peculiarity of their economy, the use of FX. Of course, there are consequences, and this is what I highlighted, but it’s an interesting case, as you said.

Working Paper on the Regulation of Stablecoins 

Beckworth: Gianluca, let’s segue now into a working paper of yours that you sent me. It’s titled “Stablecoin 101: A T-Account Sectoral Analysis Across Regulatory Regimes.” This paper really speaks to the point you raised earlier. When you’re thinking of financial issues and approaches, each country is going to have a different way of doing things, including stablecoins.

You note this; you compare Europe, the UK, and the US. Your focus is mostly on the US, but they each have different approaches to implementing stablecoins, what’s going to back those stablecoins, and therefore it’s a little bit of a different structure. You take a T-account approach. Let me begin by asking this question because in some sense this is a very basic paper, but I think it’s an important paper. We need to understand the basics. What motivated you and your co-author to write it?

Benigno: Thank you for looking at the paper. I think, as you said, it’s important to have some sort of basic background in terms of how all this works. It’s motivated because there is a lot of interest about stablecoins for various reasons, including the GENIUS Act and also other regulatory measures that have been approved or been taken into consideration by other jurisdictions. Also because, of course, we are moving more toward this digital version of the international monetary system, so possibly, this has a much bigger implication than our paper itself. It’s a paper that describes how stablecoins account through the system.

That’s why we call it the T-account because we just look at the impact on how stablecoins enter in the system. What are the effects at the level of the different actors that are involved when a unit of token is created, is minted in the system. Regulatory differences matter a lot for determining how that unit transmits into the economy. Effectively, those regulatory choices are also choices in terms of the transmission mechanism of how stablecoins affect the economy. We focus the most on the GENIUS Act type of regulation, in which the backing comes from short-term Treasury, TBLs to be precise.

Of course, dollar stablecoins, the deal in terms of the ones that are the most spread around the world probably have a more relevant impact in terms of not just, I would say, more likely, in my opinion, outside the US than in the US. Yes, the idea is to try really to understand how all this works. One implication of this, if I can just maybe anticipate it, is that, of course, potentially, in the context of the US regulatory environment, that can have implications at the margin for reserve demand because of how that is transmitted into the US economy.

Beckworth: One of the big takeaways I got from your paper is—this is maybe too much of a simplification, but hear me out—that stablecoins will relocate rather than create in terms of safe assets. They’re not creating so much new money or public debt, but simply transferring from one balance sheet to another in most cases. They do have other consequences. As you note in your paper, they shift existing safe assets from yield-sensitive investors to yield-insensitive stablecoin issuers. It may also affect what banks in the banking system hold deposits, if there’s going to be deposits.

Maybe we see some community banks shut down in the US and we have more broker-dealer banks or custodial banks. At the aggregate level, it’s not much of an effect. Structurally, there’s going to be some underlying changes. Maybe speak to what you see. Let’s start with the GENIUS Act in the US. What are the structural changes or consequences you see happening because of it?

Benigno: Let me first step back a little bit. I think you made a very good summary of one of the key implications of stablecoins. The key implication is that it does not expand money supply. For example, many aggregates are the same. What is affected the most is distribution. We emphasize the distributional consequences of stablecoins. For example, there is a transfer of seigniorage between private entities, if you focus on US GENIUS Act regulation. Effectively, the stablecoin issuer is providing a token that is unremunerated. At the same time, on the asset side of the balance sheet, this token is backed by a T-bill that is remunerated.

That gap between different rates on assets and liabilities, the seigniorage that is transferred at the issuer of the stablecoin from another private agent in the economy, the bank, that had that privilege earlier on. That’s what happens in the specificity of the US situation and the GENIUS Act. This is one aspect. Distributional effects rather than aggregate effects. Nothing changes in terms of the fiscal side unless, of course, the fiscal authority decides to issue more T-bills. That is a different choice. It has nothing to do with the creation of the token.

The other aspect that is important for what we just discussed is the fact that, at the level of the banking sector, potentially, you might have substitution in terms of different types of liabilities from retail deposit toward wholesale deposit that demand different regulatory constraint. That might increase the demand of reserve at the margin. Conditional on these changes, you might have differences in terms of also reserve demand. This is for the US case. We go through all these different cases focusing, as you mentioned earlier, on the US, and also Bank of England regulation that allows the issuer to hold reserves at the central bank.

This is not something that is allowed in the United States. Also, the European Central Bank, on the other hand, the regulatory environment allows for deposit as a form of backing for the issuer of the stablecoin. All these have different implications. It’s also fascinating in terms of understanding what can be the implication of all this. It was an interesting exercise in terms of trying to understand how all this works.

Beckworth: Let me go to the point you raised about there might be a shift in form or distribution from retail accounts or deposits to wholesale. In turn, that may increase the demand for reserve. Maybe there’s more custodial banks now that have picked up what were previously maybe retail deposits. Those custodial banks now maybe through, say, a skinny Fed master account, have direct access to the Fed’s balance sheet. Therefore, the Fed’s balance sheet grows more than it would have had they been somewhere else.

This is an argument that you make in this paper. You’re still arguing, though, that at the aggregate level, there’s not a change in the amount of money or public debt, even though there may be more reserves issued. Is that right?

Benigno: There’s no change. That is a secondary effect in terms of demand of reserves. The impact effect is not an effect on which you have any changes in reserves at the level of the central bank. Nothing changes when there is a creation. Then, of course, there might be consequences that come from how the creation is transmitted to the economy that can generate demand of reserves. That’s a marginal second step. 

Beckworth: Second step? Okay.

Benigno: Yes.

Beckworth: Gianluca, people can get this paper from you. They can reach out to you if they want to look at the T-accounts themselves.

Benigno: Yes.

Beckworth: Let me step back from all the T-accounts, all the hard work you put into it, and ask a question from this perspective. There are calls that have been made and predictions that we could get up to, say, $3 to $4 trillion in stablecoins within a decade, we’re at about $300 billion now. That’s a big increase. Let’s assume most of those are backed by Treasury bills. Are you arguing that this increase in stablecoins—again, let’s pick the biggest number, $4 trillion—is going to be a net new demand for T-bills or not?

Benigno: Well, it is a demand for T-bills, as you point out. What is important is what the debt management office will do in terms of issuance strategy. That’s something we also discuss briefly in this working paper. If the amount of T-bills doesn’t change, that will, of course, affect the price and yield within the maturity span that is allowed by regulations.

Short-term debts are going to be affected. Otherwise, accommodation by the Treasury will mitigate this price effect. You will have a strategy that might accommodate, as I said, the new demand. Effectively, the issuer, as you pointed out, is inelastic in terms of return. They just need to have T-bills as backing for regulatory reasons. To the extent to which this stablecoin demand reaches those levels, then they need to have, as a backing, $4 trillion T-bills, and that will, of course, create pressure in terms of compressing returns. This is actually the idea of the other paper that we wanted to work on. The effects of stablecoins on T-bills rates, what we call the stablecoin compression premium.

We said, “Let’s try to understand everything properly.” That’s why we brought the “Stablecoin 101.” That’s what would happen. It’s going to be another aspect in which there is a crucial interaction from a regulatory authority that has set the parameters under which the issuer can issue this token in the fiscal side here through the debt management office, how they decide and the composition from a maturity point of view of debt issuances. There is this other dimension that is going to be important for understanding what are the effects of stablecoins, how also they affect potentially the fiscal side because they might create, theoretically, an incentive to issue more short term if the compression is substantial in terms of interest rates.

Beckworth: As you mentioned earlier, that’s a separate policy question. Does the Treasury issue more T-bills? You’re saying it could create the incentive, at least, to do that if it lowers the cost of financing them.

Benigno: Yes.

Beckworth: This is an important issue, and we’ll come back to it, I’m sure, in the future because, as you know, the GENIUS Act, the regulations are being written now for it. Also, we have on the table these new skinny Fed master accounts, which are supposed to be coming due very soon. One bank, Kraken, which is a fintech company, has gotten one to run with. I think the wide adoption or the wide availability is still to happen in the fall. This is an important paper. Again, you can reach out to Gianluca, and he’ll provide you a copy of it. 

Inflation

Now, Gianluca, I want to transition the time we have left to another topic that you’ve been writing on. Again, folks can find this in your Substack. It’s inflation. As everyone who’s listening or watching this knows, we’ve had a real challenge getting inflation down to its target in the US. There’s similar challenges abroad as well, except Switzerland seems to be the only country that’s done a great job with this. You’ve talked about the return of nonlinear inflation. Now, before I read your article, you know what I thought when you said nonlinear inflation? I thought of a nonlinear Phillips curve or something. What do you mean by nonlinearinflation returning?

Benigno: Thank you for referring to those pieces. The test is motivated by also research that will soon be available, or you can ask me if you want for a paper that we’ve been working with my former colleagues at the Federal Reserve Bank of New York and one of my current students at the University of Lausanne, in which by nonlinear inflation, we refer to situations in which there are shocks that occur globally that are big in size. We studied this going back to the disruptions that have occurred at the level of supply chain during COVID.

In our study, we used the index that we have developed at the New York Fed, the Global Supply Chain Pressure Index, to identify those episodes in which those disruptions are particularly severe. What I argue is that, possibly with the closure of the Strait of Hormuz, we have hit another situation in which we have a nonlinear shock. A disruption that can be related to what has happened post-COVID. The interesting aspect in our study is that this type of shock transmits very differently from a normal-sized shock because they generate persistence. They imply that inflation, especially at the level of core inflation, lasts much longer than a normal type of shock.

That’s what global nonlinear inflation refers to. It refers to global shock that, in particular, we identify at the level of supply chain that can have an impact effect but also last much longer. They’re very difficult to tame for various reasons. They last longer because of the propagation of the shock through the system. The input-output connection, the production network, but also because when they last longer, they might also create adjustment at the level of wage dynamics that can feed further into core measure of inflation and imply that the persistence is actually quite long.

Beckworth: This has implications then for how we conduct monetary policy. The textbook story is, you look through supply shocks or cost shocks because they’re temporary. You’re saying these are special kinds of supply shocks or cost shocks that have persistence. I’m guessing your concern is they may affect inflation expectations, and so we should be more careful with them. Is that the policy implication?

Benigno: Policy implications are very delicate for this type of shock. Also in this particular case of this current environment, let me explain why I think this requires further analysis and thinking. Yes, there is that channel that you mentioned, and the fact that, eventually, inflation expectations might embed this persistence and require adjustment, as I mentioned earlier, through wages. That’s one channel. That’s a possibility that is conditional, for example, also on the status of the labor market. Another channel through which this propagates is more structural in terms of what I said earlier, that is related to the natural propagation of shock in a system or in an economy that is interconnected. There’s not much you can do there because it propagates no matter what. In that sense, it’s structural. 

In this particular case, I would say there is something else that is happening or might happen, which is the fact that this type of shock or what is happening at the level of the Strait of Hormuz and is first materialized through energy prices might next also appear through food prices and affect a special type of good, which are what I refer to as essential goods, things that we need. We need food, we need energy. We cannot cut on those as much as we can cut on other discretionary components of our consumption basket. In that sense, this is very delicate.

You make policy choice more delicate because you think that policy can have actually even more severe consequences for the population that is more exposed to those essential goods because of limited consumption possibilities, and they might face also another one-way effect coming from higher interest rates. It’s not obvious to me that the right response is increasing rates when there are these types of shocks.

You need to consider the possibility that, in the current circumstances, these shocks, to the extent to which they affect essentiality of consumption goods, they might have implications for policy that might be less related to the traditional way of thinking, I would say. Even if there are these potential channels and more persistence, then you might want to be careful in terms of not heating the economy more through hiking interest rates because, effectively, you’re not addressing the problem. You make it worse because of essential goods being something that we all need.

Beckworth: Okay. With that, our time is up. Our guest today has been Gianluca Benigno. Gianluca, thank you so much for coming on the show. Listeners, you can find him at his Substack newsletter, The Central Banks’ Watcher. Gianluca, thank you again.

Benigno: Thank you very much, David. Always a pleasure and looking forward to reading more of your work.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth, and follow the show @Macro_Musings.