John Rolle on The Bahamas' Fixed Exchange Rate and the First Nationwide Central Bank Digital Currency

David Beckworth (0:02)

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 John Rolle. John is the governor of the Central Bank of The Bahamas. He is a longtime veteran of the institution. He joins us today to discuss what it's like to manage a central bank in a small open economy with a fixed exchange rate. He also joins us to discuss the Sand Dollar, the CBDC of The Bahamas, and other topics. John, welcome to the program.

John Rolle (0:48)

David, thank you for having me. It's a pleasure to be here.

David Beckworth (0:51)

Well, it's great to have you, Juan. It's great to have a central bank governor. We just had another one from the Ricks Bank. Now, that's a small open economy central bank with a floating exchange rate. So it's great to get your perspective because you're a small open economy central bank with a fixed exchange rate. So a different set of issues, some similar, some different, and it's great to work through all of those implications.

Now, I also want to let the listeners know, John, that I'm connected to you through a colleague of mine, Virgil Storr. He is a colleague of mine here at the Mercatus Center. And he said, Hey, David, I got this great person for the podcast.

He's a relative of mine through marriage. I think you would love him. And I said, Who's that? He said, John, he's the governor of the Central Bank of The Bahamas. Let's do this. So he set us up and I'm so grateful, John, you've taken time out today to talk about your central bank.

John Rolle (1:42)

Well, David, thank you again. And let me say that I've taken a lot of opportunities since we were introduced to listen to the podcast and they are very interesting. So you've found a new subscriber.

David Beckworth (1:57)

Oh, great. Fantastic. Good to know we got listeners in The Bahamas. So there you go, folks. All right. Well, let's talk about the Central Bank of The Bahamas.

And for listeners who are not familiar with institution, maybe walk us through what it is, its main responsibilities and how it's different than a standard central bank in Europe, the ECB or the Fed.

John Rolle (2:19)

So just for context, in The Bahamas, we have a fixed exchange rate. So we have the Bahamian dollar that is tied one to one with the US dollar and it has been that way since the 1960s. Before that, we were also a fixed exchange rate country, but we switched to the US dollar during the 60s as the Bretton Woods system is coming to an end because we wanted to maintain the connection for tourism.

So in The Bahamas, from that perspective, when you look at the Central Bank and what we do, our primary objective is maintaining that fixed exchange rate. So monetary policy is focused around the stability of the currency. We also have responsibility for regulating the banking sector with the financial stability and other implications that follow from that, and as is common in Central banking space, we also have a mandate for payments. Those are the three broad areas that we focus on in the Central Bank of The Bahamas.

I think I should also say that we also have two other important regulators in The Bahamas given the way we divide responsibilities. One of those is responsible for insurance, and then we have a non-bank securities regulator that also focuses on digital assets and the investment sector. Those are the other two regulators alongside the Central Bank that have some shared responsibilities for parts of the financial sector.

David Beckworth (3:54)

So what is the benefit of the PEG? You've got a fixed exchange rate. You're effectively importing the Fed's monetary policy because of that. So what do you gain by PEGing to the dollar, one-to-one?

John Rolle (4:05)

Well, if you go back historically, it provided a seamless convenience for the tourism-dependent economy, meaning that it was not only a fixed exchange rate, but it was tied one-to-one to the US dollars. And so in an environment where physical cash circulated a lot more in the tourism space, and tourism is priced in dollars, that was a tremendous advantage and benefit for the Bahamas being so close to the US, and also having an economy that, if you look at it from the theoretical sense, we look a lot like an optimum currency area insofar as being near to the United States. So the challenges that you might typically have in having a fixed exchange rate and how you could have your misalignments, those pressures don't present themselves to that extent for us.