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Overcoming the Zero Bound on Nominal Interest Rates: Gesell's Currency Carry Tax vs. Eisler's arallel Virtual Currency

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Wilem H. Buiter

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Abstract

Despite the zero lower bound on the short nominal interest rate in Japan having become a binding constraint, conventional monetary policy in Japan, in the form of generalised open market purchases of government securities of all maturities, has never been pushed to the limit where all outstanding government debt and all current and anticipated future government deficits are (or are confidently expected to be) monetised. Open market purchases of private securities can create serious governance problems. Two ways of overcoming the zero lower bound constraint have been proposed. The first is Gesell's carry tax on currency. The second is Eisler's proposal for the unbundling of the medium of exchange/means of payment function and the numeraire function of money through the creation of a parallel virtual currency. This raises the fundamental issue of who chooses or what determines the numeraire used in private wage and price contracts - an issue that is either not addressed in the literature or addressed incorrectly. On balance, Gesell's proposal appears to be the more robust of the two.

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Paper provided by Institute of Economic Research, Hitotsubashi University in its series Hi-Stat Discussion Paper Series with number d05-96.

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Date of creation: Jun 2005
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Handle: RePEc:hst:hstdps:d05-96

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Related research
Keywords: zero bound; deflation; carry tax on currency; parallel virtual currency;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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  1. Willem H. Buiter, 2003. "Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap," NBER Working Papers 10163, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Willem H Buiter & Nikolaos Panigirtzoglou, . "Liquidity traps: how to avoid them and how to escape them," Bank of England working papers 111, Bank of England. [Downloadable!]
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  3. Willem H. Buiter, 2005. "New Developments in Monetary Economics: Two ghosts, Two Eccentricities, a Fallacy, a Mirage and a Mythos," Economic Journal, Royal Economic Society, vol. 115(502), pages C1-C31, 03. [Downloadable!] (restricted)
  4. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
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  5. Willem H. Buiter, 2003. "Deflation: Prevention and Cure," NBER Working Papers 9623, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Willem H. Buiter & Nikolaos Panigirtzoglou, 2003. "Overcoming the zero bound on nominal interest rates with negative interest on currency: gesell's solution," Economic Journal, Royal Economic Society, vol. 113(490), pages 723-746, October. [Downloadable!] (restricted)
  7. Mitsuhiro Fukao, 2005. "The Effects of 'Gesell' (Currency) Taxes in Promoting Japan's Economic Recovery," Hi-Stat Discussion Paper Series d05-94, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  8. Willem Buiter, 2007. "Is Numérairology the Future of Monetary Economics?," Open Economies Review, Springer, vol. 18(2), pages 127-156, April. [Downloadable!] (restricted)
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