IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/15-224.html
   My bibliography  Save this paper

Breaking Through the Zero Lower Bound

Author

Listed:
  • Ruchir Agarwal
  • Miles Kimball

Abstract

There has been much discussion about eliminating the “zero lower bound” by eliminating paper currency. But such a radical and difficult approach as eliminating paper currency is not necessary. Much as during the Great Depression—when countries were able to revive their economies by going off the gold standard—all that is needed to empower monetary policy to cut interest rates as much as needed for economic stimulus now is to change from a paper standard to an electronic money standard, and to be willing to have paper currency go away from par. This paper develops the idea further and shows how such a mechanism can be implemented in a minimalist way by using a time-varying paper currency deposit fee between private banks and the central bank. This allows the central bank to create a crawling-peg exchange rate between paper currency and electronic money; the paper currency interest rate can be either lowered below zero or raised above zero. Such an ability to vary the paper currency interest rate along with other key interest rates, makes it possible to stimulate investment and net exports as much as needed to revive the economy, even when inflation, interest rates, and economic activity are quite low, as they are currently in many countries. The paper also examines different options available to the central bank to return to par when negative interest rates are no longer needed, and the associated implications for the financial sector and debt contracts. Finally, the paper discusses various legal, political, and economic challenges of putting in place such a framework and how policymakers could address them.

Suggested Citation

  • Ruchir Agarwal & Miles Kimball, 2015. "Breaking Through the Zero Lower Bound," IMF Working Papers 15/224, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:15/224
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=43358
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Andrew Binning & Junior Maih, 2016. "Forecast uncertainty in the neighborhood of the effective lower bound: How much asymmetry should we expect?," Working Paper 2016/13, Norges Bank.
    2. Michael Boutros & Jonathan Witmer, 2017. "Monetary Policy Implementation in a Negative Rate Environment," Staff Working Papers 17-25, Bank of Canada.
    3. Corsetti, Giancarlo & Dedola, Luca & Jarociński, Marek & Maćkowiak, Bartosz & Schmidt, Sebastian, 2016. "Macroeconomic stabilization, monetary-fiscal interactions, and Europe’s monetary union," Working Paper Series 1988, European Central Bank.
    4. Gerhard Rösl & Franz Seitz & Karl-Heinz Tödter, 2017. "Besser ohne Bargeld? Gesamtwirtschaftliche Wohlfahrtsverluste der Bargeldabschaffung," ROME Working Papers 201706, ROME Network.
    5. Fischer, Stanley, 2016. "Monetary Policy, Financial Stability, and the Zero Lower Bound : a speech at the Annual Meeting of the American Economic Association, San Francisco, California, January 3, 2016," Speech 886, Board of Governors of the Federal Reserve System (U.S.).
    6. N. Gregory Mankiw & Ricardo Reis, 2018. "Friedman's Presidential Address in the Evolution of Macroeconomic Thought," Journal of Economic Perspectives, American Economic Association, vol. 32(1), pages 81-96, Winter.
    7. Arteta,Carlos & Kose,Ayhan & Stocker,Marc & Taskin,Temel, 2016. "Negative interest rate policies : sources and implications," Policy Research Working Paper Series 7791, The World Bank.
    8. Richard Dennis, 2016. "Durations at the Zero Lower Bound," IMES Discussion Paper Series 16-E-11, Institute for Monetary and Economic Studies, Bank of Japan.
    9. Gauti B. Eggertsson & Ragnar E. Juelsrud & Ella Getz Wold, 2017. "Are Negative Nominal Interest Rates Expansionary?," NBER Working Papers 24039, National Bureau of Economic Research, Inc.
    10. Michael D. Bordo & Andrew T. Levin, 2017. "Central Bank Digital Currency And The Future Of Monetary Policy," Economics Working Papers 17104, Hoover Institution, Stanford University.
    11. Stefano Neri & Giuseppe Ferrero, 2017. "Monetary policy in a low interest rate environment," Questioni di Economia e Finanza (Occasional Papers) 392, Bank of Italy, Economic Research and International Relations Area.
    12. repec:pal:compes:v:59:y:2017:i:2:d:10.1057_s41294-017-0019-3 is not listed on IDEAS
    13. Barrdear, John & Kumhof, Michael, 2016. "The macroeconomics of central bank issued digital currencies," Bank of England working papers 605, Bank of England.
    14. Jonathan Chiu & Thorsten Koeppl, 2017. "The Economics of Cryptocurrencies - Bitcoin and Beyond," Working Papers 1389, Queen's University, Department of Economics.
    15. Rösl, Gerhard & Seitz, Franz & Tödter, Karl-Heinz, 2017. "Doing away with cash? The welfare costs of abolishing cash," IMFS Working Paper Series 112, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    16. Koichiro Kamada, 2017. "The Transactions Demand for Paper and Digital Currencies," IMES Discussion Paper Series 17-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    17. Juan Carlos Berganza & Pedro del Río & Fructuoso Borrallo, 2016. "Determinants and implications of low global inflation rates," Occasional Papers 1608, Banco de España;Occasional Papers Homepage.
    18. Jean-Pierre Danthine, 2017. "The Interest Rate Unbound?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 59(2), pages 129-148, June.
    19. Walter Engert & Ben Fung, 2017. "Central Bank Digital Currency: Motivations and Implications," Discussion Papers 17-16, Bank of Canada.
    20. repec:eee:jpolmo:v:39:y:2017:i:4:p:673-679 is not listed on IDEAS
    21. repec:aea:jecper:v:31:y:2017:i:3:p:47-66 is not listed on IDEAS
    22. Seitz, Franz & Krueger, Malte, 2017. "The Blessing of Cash," International Cash Conference 2017 – War on Cash: Is there a Future for Cash? 162911, Deutsche Bundesbank.
    23. repec:pal:buseco:v:52:y:2017:i:1:d:10.1057_s11369-017-0031-7 is not listed on IDEAS
    24. Christian Pfister, Natacha Valla, 2018. "‘New Normal’ or ‘New Orthodoxy’? Elements of a Central Banking Framework for the After-Crisis," Working papers 680, Banque de France.

    More about this item

    Keywords

    Monetary policy; Negative interest rates; electronic money; currency; paper currency; interest rate; money; interest rates; General; All Countries;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:15/224. 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: (Jim Beardow) or (Hassan Zaidi). General contact details of provider: http://edirc.repec.org/data/imfffus.html .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.