5 - Life at the Zero Lower Bound and How to Escape from It

Summary

Chapter 5 uses the model of the previous Chapter to discuss three ways to eliminate the zero lower bound on nominal interest rates: (1) abolish currency; (2) tax currency’ and (3) introduce a variable exchange rate between currency and bank reserves (deposits) with the central bank. We come down in favor of getting rid of cash as the most robust of these three options. This would have the further advantage of eliminating a preferred store of value and means of payment for illegal activities. There are both economic and political costs associated with the abolition of cash, however. Some of these can be addressed or at least mitigated by eliminating only the larger denomination currency notes. This would lower the effective lower bound without eliminating it.

We confirm that helicopter money drops stimulate nominal aggregate demand even when the economy is permanently at the zero lower bound.