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Briefing
Rounding Up: The Impact of Phasing Out the Penny
The U.S. government is expected to stop producing new pennies for circulation by early 2026. In 2024, the Treasury incurred a seigniorage loss of $85.3 million on penny production.As pennies phase out, businesses are likely to round cash transactions to the nearest 5 cents, resulting in a "rounding tax."Using data from the 2023 Diary of Consumer Payment Choice, we estimate that rounding tax could cost U.S. consumers approximately $6 million annually.Eliminating the nickel in addition to the penny could result in significantly higher rounding costs: up to $56 million per year for consumers.
Working Paper
Artificial Intelligence and Technological Unemployment
How large are the effects of artificial intelligence (AI) on labor productivity and unemployment? We develop a labor-search model of technological unemployment where AI learns from workers, raises productivity, and displaces them if renegotiation fails. The model admits three steady states: no AI; some AI with limited capability, more job creation but higher unemployment; unbounded AI with endogenous growth and employment gains. Calibrated to U.S. data, the model implies a threefold productivity gain but a 23% employment loss, half within five years. Plausible parameters give rise to global ...
Working Paper
A Tractable Model of Monetary Exchange with Ex-Post Heterogeneity
We construct a continuous-time, New-Monetarist economy with general preferences that displays an endogenous, non-degenerate distribution of money holdings. Properties of equilibria are obtained analytically and equilibria are solved in closed form in a variety of cases. We study policy as incentive-compatible transfers financed with money creation. Lump-sum transfers are welfare-enhancing when labor productivity is low, but regressive transfers achieve higher welfare when labor productivity is high. We introduce illiquid government bonds and draw implications for the existence of ...
Briefing
Why Stablecoins Fail: An Economist’s Post-Mortem on Terra
Why do some stablecoins, such as Terra's UST, fail but others do not? Was Terra just an unlucky victim of a classic bank run or speculative attack? Or was its high-yield deposit offering doomed to fail like a Ponzi scheme? What is the limit of the stablecoin's algorithm? What makes payment stable? In this article, we'll dive into potential answers to these questions about the failed stablecoin.
Briefing
What Is SWIFT, and Could Sanctions Impact the U.S. Dollar's Dominance?
The recent removal of Russian banks from the SWIFT messaging system has highlighted the importance of payments in supporting economies. But the weaponization of SWIFT has also left some commentators worrying about the loss of the U.S. dollar's dominance, as it might drive banks and firms to other substitutes. This Economic Brief discusses the economics of SWIFT and explains why emigrating from the U.S. dollar may be more difficult than we thought.
Briefing
A Historical Perspective on Digital Currencies
This article reviews private currencies in U.S. history to shed light on the contemporary issue of digital currencies. This perspective suggests that government interventions have a critical role in creating a well-functioning money and payments system. Particularly, a central bank digital currency (CBDC) can be a useful tool to supplement regulation in addressing long-standing concerns and risks associated with private currencies.
Briefing
Should the Fed Issue Digital Currency?
The United States might benefit from eventually replacing most physical cash with central bank digital currency (CBCD), but first the Federal Reserve must resolve several key policy and implementation issues, such as establishing comparative advantage over private issuers and ensuring safety and soundness.
Working Paper
Optimal Incentive Contracts with Job Destruction Risk
We study the implications of job destruction risk for optimal incentives in a long-term contract with moral hazard. We extend the dynamic principal-agent model of Sannikov (2008) by adding an exogenous Poisson shock that makes the match between the firm and the agent permanently unproductive. In modeling job destruction as an exogenous Poisson shock, we follow the Diamond-Mortensen-Pissarides search-and-matching literature. The optimal contract shows how job destruction risk is shared between the rm and the agent. Arrival of the job-destruction shock is always bad news for the rm but can be ...
Briefing
What Is a Crypto Conglomerate Like FTX? Economics and Regulations
We explain the economics behind the rise and fall of FTX. We view FTX and its associates as components making up one large entity: a crypto conglomerate. Understanding the economics of crypto conglomerates is crucial for designing effective regulations.