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Dealing with Monetary Paralysis at the Zero Bound

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  • Kenneth Rogoff

Abstract

Recently, the key constraint for central banks is the zero lower bound on nominal interest rates. Central banks fear that if they push short-term policy interest rates too deeply negative, there will be a massive flight into paper currency. This paper asks whether, in a world where paper currency is becoming increasingly vestigial outside small transactions (at least in the legal, tax compliant economy), there might be relatively simple ways to finesse the zero bound without affecting how most ordinary people live. Surprisingly, this question gets little attention compared to the massive number of articles that take the zero bound as given and look for out-of-the-box solutions for dealing with it. In an inversion of the old joke, it is a bit as if the economics literature has insisted on positing "assume we don't have a can opener," without considering the possibility that we might be able to devise one. It makes sense not to wait until the next financial crisis to develop plans. Fundamentally, there is no practical obstacle to paying negative (or positive) interest rates on electronic currency and, as we shall see, effective negative rate policy does not require eliminating paper currency.

Suggested Citation

  • Kenneth Rogoff, 2017. "Dealing with Monetary Paralysis at the Zero Bound," Journal of Economic Perspectives, American Economic Association, vol. 31(3), pages 47-66, Summer.
  • Handle: RePEc:aea:jecper:v:31:y:2017:i:3:p:47-66
    Note: DOI: 10.1257/jep.31.3.47
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    References listed on IDEAS

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    Cited by:

    1. Donato Masciandaro, 2018. "Central Bank Digital Cash and Cryptocurrencies: Insights from a New Baumol–Friedman Demand for Money," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(4), pages 540-550, December.
    2. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, April.
    3. Altavilla, Carlo & Burlon, Lorenzo & Giannetti, Mariassunta & Holton, Sarah, 2019. "Is There a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms," CEPR Discussion Papers 14050, C.E.P.R. Discussion Papers.
    4. Bottero, Margherita & Minoiu, Camelia & Peydro, Jose-Luis & Polo, Andrea & Presbitero, Andrea & Sette, Enrico, 2019. "Expansionary Yet Different: Credit Supply and Real Effects of Negative Interest Rate Policy," CEPR Discussion Papers 14233, C.E.P.R. Discussion Papers.
    5. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    6. Emanuele Borgonovo & Stefano Caselli & Alessandra Cillo & Donato Masciandaro & Giovanno Rabitti, 2018. "Cryptocurrencies, central bank digital cash, traditional money: does privacy matter?," BAFFI CAREFIN Working Papers 1895, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    7. Anthony Brassil & Jon Cheshire & Joseph Muscatello, 2018. "The Transmission of Monetary Policy through Banks' Balance Sheets," RBA Annual Conference Volume (Discontinued), in: John Simon & Maxwell Sutton (ed.),Central Bank Frameworks: Evolution or Revolution?, Reserve Bank of Australia.
    8. Porcellacchia, Davide, 2020. "What is the tipping point? Low rates and financial stability," Working Paper Series 2447, European Central Bank.
    9. Emanuele Borgonovo & Stefano Caselli & Alessandra Cillo & Donato Masciandaro, 2018. "Between Cash, Deposit And Bitcoin: Would We Like A Central Bank Digital Currency? Money Demand And Experimental Economics," BAFFI CAREFIN Working Papers 1875, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    10. Carlo Altavilla & Miguel Boucinha & Lorenzo Burlon, 2020. "The Economic Consequences of Negative Interest Rates," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 21(01), pages 13-17, April.
    11. Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Truger, Achim & Wieland, Volker, 2019. "Den Strukturwandel meistern. Jahresgutachten 2019/20," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201920, March.
    12. Christian Pfister & Jean-Guillaume Sahuc, 2020. "Unconventional monetary policies: A stock-taking exercise," Revue d'économie politique, Dalloz, vol. 130(2), pages 137-169.
    13. Kenneth S. Rogoff, 2017. "Response to Jeffrey Rogers Hummel's Review of The Curse of Cash," Econ Journal Watch, Econ Journal Watch, vol. 14(2), pages 164–173-1, May.
    14. Ruchir Agarwal & Miles Kimball, 2019. "Enabling Deep Negative Rates to Fight Recessions: A Guide," IMF Working Papers 19/84, International Monetary Fund.
    15. van Riet, Ad, 2017. "Monetary Policy Stretched to the Limit: How Could Governments Support the European Central Bank?," MPRA Paper 83451, University Library of Munich, Germany.
    16. Christian Stettler, 2020. "Loss Averse Depositors and Monetary Policy around Zero," KOF Working papers 20-476, KOF Swiss Economic Institute, ETH Zurich.
    17. Rogoff, Kenneth, 2017. "Monetary policy in a low interest rate world," Journal of Policy Modeling, Elsevier, vol. 39(4), pages 673-679.
    18. Mojmir Hampl & Tomas Havranek, 2020. "Central Bank Equity as an Instrument of Monetary Policy," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 62(1), pages 49-68, March.
    19. Margherita Bottero & Camelia Minoiu & José-Luis Peydro & Andrea Polo & Andrea F Presbitero & Enrico Sette, 2019. "Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data," IMF Working Papers 19/44, International Monetary Fund.
    20. Tekam Oumbe & Chouafi Nguekam & Takoulac Kamta & Ongo, 2020. "Retrospective Analysis of the Application of the ECBs Key Interest Rates to the Macroeconomic Indicators of the CEMAC," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 8(3), pages 141-151, September.

    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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