Breaking Through the Zero Lower Bound

By Ruchir Agarwal, Miles S. Kimball. Social Science Research Network, 2015

137 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/659f3131c11338aef6fa7280ecb3fa5eaa660de0

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Citations in the corpus

Negative Nominal Interest Rates and the Bank Lending Channel (2019, unknown): “These policies are discussed in, among others, Agarwal and Kimball (2015), Rogoff (2017a) and Rogoff (2017b), who also suggest more elaborate policy regimes to circumvent the ZLB.”
The Economics of Cryptocurrencies—Bitcoin and Beyond (2017, unknown): “Agarwal and Kimball (2015) advocate here that the adoption of digital currencies can facilitate the implementation of a negative interest rate policy, while Rogoff (2016) suggests that phasing out paper currency can undercut undesirable tax evasion and criminal activities.”
Central bank digital currency and monetary policy (2021, background): “In a related discussion, Agarwal and Kimball (2015) argue that if cash and CBDC co-exist, allowing for the exchange rate to be different from par makes it possible to implement a negative interest rate policy.”
The Macroeconomics of Central Bank Issued Digital Currencies (2016, background): “Various proposals for materially circumventing the ZLB have been put forward, including, among others, a tax on banknotes (Gesell (1916)), a managed exchange rate between cash and electronic forms of money (Agarwal and Kimball (2015)) and the abolition of cash altogether (Rogoff (2015)).”
Designing Central Bank Digital Currencies (2019, background): “On the relationship between CBDC and monetary transmission, see Agarwal and Kimball (2015, 2019), Assenmacher and Krogstrup (2018), Barrdear and Kumhof (2016), Bordo and Levin (2017), Bjerg (2017), Davoodalhosseini (2018), Goodfriend (2016), Meaning et al. (2018), and Niepelt (2018).”
Is there a zero lower bound? The effects of negative policy rates on banks and firms (2019, unknown): “2 See also Lilley and Rogoff (2019), Agarwal and Kimball (2015) and Buiter and Panigirtzoglou (2003). 3 Banks are also able to raise fees on deposits, which makes lowering interest rates unnecessary when deposits are small.”