DP7346 Negative Nominal Interest Rates: Three ways to overcome the zero lower bound

Author(s): Willem H. Buiter

Publication Date: June 2009

Keyword(s): Monetary policy , zero interest rate policy , liquidity trap , quantitative easing , Gesell , Eisler

JEL(s): B1 , B2 , B3 , E1 , E3 , E4 , E5 , F3 , F4 , G1 , H2

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP7346.asp.asp

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.