IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

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

  • Willem H. Buiter

An economy is in a liquidity trap when monetary policy cannot influence either real or nominal variables of interest. A necessary condition for this is that the short nominal interest rate is constrained by its lower bound, typically zero. The paper considers two small analytical models, one Old-Keynesian, the other New-Keynesian possessing equilibria where not only the short nominal interest rate, but 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 (including currency) at or below the nominal interest rate on non-monetary instruments, the lower bound equilibria are eliminated, thus allowing an economic system to avoid the trap or to escape from it. This rule will involve paying negative interest on currency, that is, imposing a ‘carry tax’ on currency, an idea first promoted by Gesell. The administration costs associated with a currency carry tax must be set against the benefits of potentially lower shoe-leather costs and lower menu costs which are made possible by the its introduction. There are also output-gap avoidance benefits from eliminating the zero lower bound trap.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://eprints.lse.ac.uk/848/
File Function: Open access version.
Download Restriction: no

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 848.

as
in new window

Length:
Date of creation: Oct 2003
Date of revision:
Publication status: Published in Economic Journal, October, 2003, 113(490), pp. 723-746. ISSN: 1468-0297
Handle: RePEc:ehl:lserod:848
Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Bryant, Ralph C, 2000. "Comment on Overcoming the Zero Bound on Interest Rate Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 1036-50, November.
  2. Baumol, William J & Tobin, James, 1989. "The Optimal Cash Balance Proposition: Maurice Allais' Priority," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1160-62, September.
  3. Arthur M. Okun, 1975. "Inflation: Its Mechanics and Welfare Costs," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 351-402.
  4. Bennett T. McCallum, 2000. "Theoretical analysis regarding a zero lower bound on nominal interest rates," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 870-935.
  5. Jag Chadha & Andrew Haldane & Norbert Janssen, 1998. "Shoe-leather costs reconsidered," Bank of England working papers 86, Bank of England.
  6. Karl-Heinz Todter & Gerhard Ziebarth, 1997. "Price Stability vs. Low Inflation in Germany: An Analysis of Costs and Benefits," NBER Working Papers 6170, National Bureau of Economic Research, Inc.
  7. Buiter, Willem H., 1977. "`Crowding out' and the effectiveness of fiscal policy," Journal of Public Economics, Elsevier, vol. 7(3), pages 309-328, June.
  8. Chan, K C, et al, 1992. " An Empirical Comparison of Alternative Models of the Short-Term Interest Rate," Journal of Finance, American Finance Association, vol. 47(3), pages 1209-27, July.
  9. Hondroyiannis, George & Swamy, P. A. V. B. & Tavlas, George S., 2000. "Is the Japanese economy in a liquidity trap?," Economics Letters, Elsevier, vol. 66(1), pages 17-23, January.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ehl:lserod:848. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LSERO Manager)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.