As you’ve probably heard, one important reason that policy options under conditions of a severe downturn get controversial is that the uncontroversial recession-fighting measure—lower interest rates—stops working when the interest rate gets down to zero. When you’re at the legal bound, there are things you can do with monetary policy, but they’re controversial. And there are things you can do with fiscal policy, but they’re also controversial. Under the circumstances, doing away with the zero bound might be useful. And in Japan, they’re considering the possibility that negative interest rates would be possible if only you did away with cash:
He said that all the proposals were radical but worth consideration for Japan. Without physical cash, a central bank can set rates exactly where it likes, runs the argument. Mr Jerram said: “At the heart of the problem of achieving negative nominal interest rates is the idea that physical currency is an anonymous bearer bond with a nominal interest rate of zero.” While a central bank can impose positive or negative rates on non-physical assets, transmitting those rates to physical currency is a huge challenge. By permanently removing cash from a system, he added, policymakers are robbed of the excuse that zero is the lowest that nominal rates can go as a deflation-fighting tool.
A cashless economy would also presumably reduce the possibilities of tax evasion and criminal activity. More for those kind of reasons, I suspect that more countries will start looking at this option in the decades to come.
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