Central banks should monitor money more: BOKA central bank should take full charge of the issue of banknotes and electronic money to reduce social costs, a report said Monday.
According to the paper published by the Bank of Korea (BOK), a complete competitive issuing system will strongly motivate private electronic money issuers to inflate their collateral and produce more e-money than they have before if there is no oversight by authorities.
In the current system, private issuers are supposed to control electronic currencies, such as prepaid cards backed by large-denominated government bonds.
“The moral hazard of e-money issuers can generate an externality under limited commitment,” said the report, adding that the unrestricted money issuance has social costs and undermines social welfare.
The report suggested the government impose a tax on e-money issuers and make them less motivated to exaggerate the value of their collateral.
“Therefore, it is desirable for the central bank to monopolize the power to issue banknotes,” said co-author Kwon Oh-ik, an economist at the BOK.
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