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Overcoming the zero bound on nominal interest rates with negative interest on currency: gesell's solution

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Author Info
Willem H. Buiter
Nikolaos Panigirtzoglou

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Abstract

The paper considers two small analytical models, one Old-Keynesian, the other New-Keynesian, possessing equilibria where nominal interest rates at all maturities can be stuck at their zero lower bound. When the authorities remove the zero nominal interest rate floor by adopting an augmented monetary rule that systematically keeps the nominal interest rate on base money at or below the nominal interest rate on non-monetary instruments, the lower bound equilibria are eliminated, thus allowing an economic system to avoid or escape from the trap. This involves paying negative interest on currency, ie, imposing a 'carry tax' on currency, an idea first promoted by Gesell. Copyright 2003 Royal Economic Society.

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Publisher Info
Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 113 (2003)
Issue (Month): 490 (October)
Pages: 723-746
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Handle: RePEc:ecj:econjl:v:113:y:2003:i:490:p:723-746

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  1. Willem Buiter, 2004. "A Small Corner of Intertemporal Public Finance - New Developments in Monetary Economics: 2 Ghosts, 2 Eccentricities, A Fallacy, A Mirage and A Mythos," NBER Working Papers 10524, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Wilem H. Buiter, 2005. "Overcoming the Zero Bound on Nominal Interest Rates: Gesell's Currency Carry Tax vs. Eisler's arallel Virtual Currency," Hi-Stat Discussion Paper Series d05-96, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  3. W.H. Buiter, 2007. "Is Numérairology the Future of Monetary Economics?Unbundling numéraire and medium of exchange through a virtual currency and a shadow exchange rate," CEP Discussion Papers dp0776, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  4. Klaus Adam & Roberto M. Billi, 2004. "Optimal monetary policy under commitment with a zero bound on nominal interest rates," Working Paper Series 377, European Central Bank. [Downloadable!]
    Other versions:
  5. Roberto Billi, 2005. "The Optimal Inflation Buffer with a Zero Bound," CFS Working Paper Series 2005/17, Center for Financial Studies. [Downloadable!]
  6. Buiter, Willem H, 2006. "How Robust is the New Conventional Wisdom? The Surprising Fragility of the Theoretical Foundations of Inflation Targeting and Central Bank Independence," CEPR Discussion Papers 5772, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Willem H. Buiter, 2004. "The Elusive Welfare Economics of Price Stability as a Monetary Policy Objective: Should New Keynesian Central Bankers Pursue Price Stability?," NBER Working Papers 10848, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Junning Cai, 2004. "Liquidity Trap Prevention and Escape: A Simple Proposition," Macroeconomics 0402033, EconWPA. [Downloadable!]
  9. Roberto M. Billi, 2005. "The Optimal Inflation Buffer with a Zero Bound on Nominal Interest Rates," Computing in Economics and Finance 2005 25, Society for Computational Economics. [Downloadable!]
  10. Roberto M. Billi, 2007. "Optimal inflation for the U.S," Research Working Paper RWP 07-03, Federal Reserve Bank of Kansas City. [Downloadable!]
  11. Willem H. Buiter, 2003. "Deflation: Prevention and Cure," NBER Working Papers 9623, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Buiter, Willem H, 2004. "Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap," CEPR Discussion Papers 4202, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Mehrotra, Aaron, 2005. "Exchange and interest rate channels during a deflationary era - Evidence from Japan, Hong Kong and China," BOFIT Discussion Papers 17/2005, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
    Other versions:
  14. Dai, Meixing, 2009. "The Design of a 'Two-Pillar' Monetary Policy Strategy," Economics Discussion Papers 2009-29, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  15. Willem H. Buiter, 2006. "The elusive welfare economics of price stability as a monetary policy objective - why New Keynesian central bankers should validate core inflation," Working Paper Series 609, European Central Bank. [Downloadable!]
  16. Buiter, Willem H, 2003. "Two Naked Emperors? Concerns about the Stability and Growth Pact and Second Thoughts About Central Bank Independence," CEPR Discussion Papers 4001, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  17. Willem H. Buiter, 2007. "Seigniorage," NBER Working Papers 12919, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Bennett T. McCallum, 2003. "Multiple-Solution Indeterminacies in Monetary Policy Analysis," NBER Working Papers 9837, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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