May 7, 2009

Negative interest rates: go for it

After a reminder by Mankiw that negative interest rates were possible (and after a rate of -2% suggested by Rigotnomics' favourite Taylor rule), Buiter is pushing Central Banks to go forward with the policy. He concludes:

"There are at least three ways to remove the zero lower bound that are feasible: abolish currency, tax currency and ensure that currency is not the numéraire. Taxing currency may be awkward and intrusive, but abolishing currency is not just easy (just do it) but also has considerable advantages as a blow against criminality and terrorism [and was suggested by Rigotnomics a while ago]. Unbundling currency and numéraire is something that can be done over the weekend.

I really don’t understand why central banks are not aggressively pursuing options for removing the zero lower bound. It is that they love the seigniorage so much? But they retain seigniorage revenue from currency issuance in the rallod economy. Is it hidebound conservatism and lack of imagination. Quite possibly. But if so, this is a costly mistake. Central banks should act to remove the zero lower bound on nominal interest rates now."

And to foreigners in developing countries and emerging markets with high-inflation-prone monetary systems, for whom the disappearance of the $US notes and the euro notes could be a setback, as these provide welcome stores of value when domestic inflation rages., he says:
"I feel your pain, but this is the time to replace exit with voice. Go and create a polity that will support a government that does not abuse the printing presses"!

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