In light of the recent 0.50% rate cut at the Reserve I would like to remind everyone of the ZLB, E-USD, and the possibility of a forced carry-cost on physical cash in the future. : Economics


Summary: Monetary policy space remains constrained by the lower bound in many countries, limiting the policy options available to address future deflationary shocks. The existence of cash prevents central banks from cutting interest rates much below zero. In this paper, we consider the practical feasibility of recent proposals for decoupling cash from electronic money to achieve a negative yield on cash which would remove the lower bound constraint on monetary policy. We discuss how central banks could design and operate such a system, and raise some unanswered questions.Notable excerpt from page 8: An alternative to phasing out cash is to make holding cash as costly as electronic money when interest rates are negative. Various proposals have been put forth for how to impose a cost on cash holdings. Gesell (1916) suggested discouraging cash hoarding by introducing a demurrage fee. His idea was that money would need to be stamped at regular intervals to remain valid and that these stamps would have to be purchased. Such a scheme was implemented in some Austrian and German communities during the Great Depression, but the practice was soon stopped by the respective central banks. A similar but untried proposal is to let banknotes expire at certain dates, forcing their holder to pay a conversion fee for changing them into new, valid banknotes (Seltmann 2010). Goodfriend (2000) suggested integrating magnetic strips into banknotes that record when the note was last withdrawn from the banking system and how much carry tax on that note is due. This option gets very close to simply replacing cash with electronic money. Mankiw (2009) proposed a lottery scheme that declares a certain number of banknotes invalid at regular intervals. While all these ideas achieve a carry cost on cash, all of them seem unworkable from a practical perspective.A different proposal to implementing a negative carry cost on cash is to change the one-to-one conversion of reserves held at the central bank into cash. Buiter (2007) shows that, in theory, a negative yield on cash can be achieved by decoupling the alue of cash from the value of electronic money and allowing cash to depreciate over time in terms of electronic money. Agarwal and Kimball (2015) develop the practical aspects of how such a system would work in more detail. Effectively, a decoupling would entail a split of the domestic money supply into two different local currencies: cash and central-bank reserves. Such a dual local currency system would allow the central bank to continue conventional monetary policy below the current effective lower bound. It would preserve the role of cash as a means of payment and, as we argue below, could be implemented with relatively small changes to central-bank operating frameworks. It should be workable from a practical perspective.


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