IMF Staff Floats Dual Money to Allow Much Deeper Negative Rates

via Bloomberg:

Ten years after the financial crisis, central bank interest rates remain near record lows and below zero in many countries, so the question is how well monetary policy would be able to respond to counter any future economic downturn.

One option could be electronic money issued in tandem with regular cash, economists at the International Monetary Fund wrote on the group’s blog. Cash, which can be held interest free, offers a way around negative rates, but electronic money issued by a central bank can’t be stuffed under any mattress.

IMF economists Ruchir Agarwal and Signe Krogstrup said that dividing the monetary base into two separate currencies — cash and electronic money — could allow rates to be cut even deeper below zero. E-money would pay whatever the policy rate is and cash would have an exchange rate against the e-cash, they wrote.

The key is the conversion rate since that would let cash depreciate at the same pace as the negative interest rate on e-money. Shops would also start advertising prices in e-money and cash separately.

“Cash would thereby be losing value both in terms of goods and in terms of e-money, and there would be no benefit to holding cash relative to bank deposits,” Agarwal and Krogstrup said. “This dual local currency system would allow the central bank to implement as negative an interest rate as necessary for countering a recession, without triggering any large-scale substitutions into cash.”

Negative rates are now reality for example in Denmark, Switzerland, Sweden as well as the euro area. It’s been possible to lower rates below zero since taking out cash in large quantities is inconvenient and costly.

Sweden has also been a good test case since the country is rapidly going more and more cash free. Its central bank, whose current benchmark is at minus 0.25 percent, is also studying issuing a so-called e-krona.


Related Posts:

We truly are under attack. We need user support now more than ever! For as little as $10, you can support the IWB directly – and it only takes a minute. Thank you. 372 views
Related Posts: