Working Paper: CEPR ID: DP7346
Authors: Willem H. Buiter
Abstract: The paper considers three methods for eliminating the zero lower bound on nominal interest rates and thus for restoring symmetry to domain over which the central bank can vary its policy rate. They are: (1) abolishing currency (which would also be a useful crime-fighting measure); (2) paying negative interest on currency by taxing currency; and (3) decoupling the numéraire from the currency/medium of exchange/means of payment and introducing an exchange rate between the numéraire and the currency which can be set to achieve a forward discount (expected depreciation) of the currency vis-a-vis the numéraire when the nominal interest rate in terms of the numéraire is set at a negative level for monetary policy purposes.
Keywords: Eisler; Gesell; Liquidity Trap; Monetary Policy; Quantitative Easing; Zero Interest Rate Policy
JEL Codes: B1; B2; B3; E1; E3; E4; E5; F3; F4; G1; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Abolishing currency (E42) | Removal of the zero lower bound (E49) |
| Currency tax (F38) | Ability to set negative nominal interest rates (E43) |
| Separation of numeraire and currency functions (F31) | Ability to implement negative nominal interest rates (E43) |
| Economic downturns (E32) | Inability to lower nominal interest rates (E43) |
| Zero lower bound (E49) | Effectiveness of monetary policy (E52) |