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.
In a cashless world, there would be no lower bound on interest rates.
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Reason #1 for never allowing them to eliminate cash.
The banks remind me of Gordon Gekko saying “I bet on sure things.”
“To get around this problem...”
That they caused in the first place, with their phony baloney plastic banana fake money.
What a bunch of douchebags.
Jokes on them. I don’t have any. Uber rich like bee-zohs may be concerned. But tax lawyers.
The worlds oldest profession mandates there will always be cash.
There would still exist gold and silver, stocks, bonds etc to put money in so it is not in a bank account.
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.
...
Cutting taxes and increasing deficit spending would be a better option.
Remember this is only for a severe economic crisis. (some people think deficit spending is always evil)
We would be far better off is the Fed sat on its hands most of the time. They cause recessions by raising interest rates too high, and then they create too much money for a recovery.
I try and go cashless as much as possible. Buying stuff from the Internet, unfortunately, requires at least a debit card which is as close to cash as you can get.
Buying with cash is also anonymous. Except for the security cameras :)
You will not eliminate cash in less than 10 years. But the left has its eyes on that. That would be nirvana for them. Complete control of ALL financial transactions. Skim 1% off every transaction. Decide how much money you “need” and take as much as they want from your accounts. (Cyprus).
Your point is well taken and is a basis for why most central banks oppose crypto-currencies and commodities outside of their control. Cant have the masses owning and taking delivery of gold / silver coins or bitcoins.
Regarding the possibility of e-money: I reckon the difference in interest rates between cash and e-money will not be big enough average Joes really worry about.
If you had millions in cash it might make a difference. But for average Joes like me, doubt it.
Well if interest rates go negative pull all your money from banks and put it into cash....
Wait that would cause a run on the banks....
These people are STUPID!!!!
That is one terrifying camel’s nose we don’t want in the tent.
Gold and Silver... ‘nuff said
The liberals and the banking industry initially proposed interest rate regulation of money market funds. When that didn't fly, President Carter finally acceded to banking deregulation, which solved the problem. Had we not eliminated Reg Q, there would soon have been no one left with savings accounts except very elderly people who stopped paying attention years ago, plus the really stupid and Democrats (but I repeat myself).
The effect of central banks enabling negative interest rates today would be similar. No one would park money in a savings account. Money would be spent, or flow into stocks and bonds, or invested in real estate, gold, or other store of value. Smarter, more aggressive and more nimble people would react quickly. The primary victims would be the elderly and less-educated people, often lower-income, who do not understand their options. Defrauding the elderly and the poor … well, the left is an old hand at that.
These other options would incur higher transaction costs and greater market risk, but they would be preferable to accepting a certain loss in a conventional savings account. A big question would be how long it would take for the financial services industry to design an instrument, presumably some form of hybridized investment account, that circumvented the regs. Not long, I'd bet.
Oops. Reg Q capped interest on savings accounts at FIVE and 5 1/4 percent, respectively, ….
I think banks are already doing this - they’re called fees.
Hi.
I ask and pray that macro and micro economics are taught properly at the high school level.
Amen.
5.56mm
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