Posted on 02/11/2019 8:53:40 AM PST by bkopto
Many central banks reduced policy interest rates to zero during the global financial crisis to boost growth. Ten years later, interest rates remain low in most countries. While the global economy has been recovering, future downturns are inevitable. Severe recessions have historically required 3–6 percentage points cut in policy rates. If another crisis happens, few countries would have that kind of room for monetary policy to respond.
To get around this problem, a recent IMF staff study shows how central banks can set up a system that would make deeply negative interest rates a feasible option.
In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.
When cash is available, however, cutting rates significantly into negative territory becomes impossible. Cash has the same purchasing power as bank deposits, but at zero nominal interest. Moreover, it can be obtained in unlimited quantities in exchange for bank money. Therefore, instead of paying negative interest, one can simply hold cash at zero interest. Cash is a free option on zero interest, and acts as an interest rate floor.
Because of this floor, central banks have resorted to unconventional monetary policy measures. The euro area, Switzerland, Denmark, Sweden, and other economies have allowed interest rates to go slightly below zero, which has been possible because taking out cash in large quantities is inconvenient and costly (for example, storage and insurance fees). These policies have helped boost demand, but they cannot fully make up for lost policy space when interest rates are very low.
One option to break through the zero lower bound would be to phase out cash. But that is not straightforward. Cash continues to play a significant role in payments in many countries. To get around this problem, in a recent IMF staff study and previous research, we examine a proposal for central banks to make cash as costly as bank deposits with negative interest rates, thereby making deeply negative interest rates feasible while preserving the role of cash.
The proposal is for a central bank to divide the monetary base into two separate local currencies—cash and electronic money (e-money). E-money would be issued only electronically and would pay the policy rate of interest, and cash would have an exchange rate—the conversion rate—against e-money. This conversion rate is key to the proposal. When setting a negative interest rate on e-money, the central bank would let the conversion rate of cash in terms of e-money depreciate at the same rate as the negative interest rate on e-money. The value of cash would thereby fall in terms of e-money.
“You will not eliminate cash in less than 10 years.”
They will never eliminate currency. If a country eliminates its currency then people will start using the best currency that they can find from other countries. Also, in a cashless society what happens when the power goes out? Will retailers and sellers then accept checks? I highly doubt it.
You have an interesting point. My understanding in many countries the US greenback paper dollar is just as good as their own currency if not better.
Or another black market type physical medium of exchange will evolve.
Proponents of MMT say you are correct.
I’m not a proponent of any theory. I just call them like I see them, and keep it simple.
I’m saying, as a means to get an economy going and causing interest rates to rise, cutting taxes is far superior, but that’s no fun for the elites who have to justify their existence.
Academics and the government make economics far more complicated than it should be.
Rising interest rates are an anathema to growth, causing increased cost of debt. Cutting taxes is fine by me, as long as it is accompanied be reduced spending in wasteful sectors, but that is barely happening. The tail is wagging the economy’s dog.
Junk silver is a perfect alternative.
Junk Silver Coins, also known as US 90% Silver Coins, generally refers to old US currency coins whose valued is based on the silver bullion value of the silver content they contain. These are 90% silver coins minted by the US Government pre-1965 (half dollars, quarters, and dimes).
The purchasing price of the silver coins could be set at some discount to the spot silver price.
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