Overcoming the Zero Bound on Interest Rate Policy

Abstract

The paper proposes three options for overcoming the zero bound on interest rate policy: a carry tax on money, open market operations in long bonds, and monetary transfers. A variable carry tax on electronic bank reserves could enable a central bank to target negative nominal interest rates. A carry tax could be imposed on currency to create more leeway to make interest rates negative. Quantitative policy--monetary transfers and open market purchases of long bonds -- could stimulate the economy by creating liquidity broadly defined. A central bank needs more fiscal support than usual from the Treasury to pursue quantitative policy at the interest rate floor.

Keywords: Banking, carry tax on money, deflation, fiscal policy, inflation tax, monetary transfers, narrow and broad liquidity services, negative nominal interest, payments technology, public debt, quantitative monetary policy, transmission mechanism, zero bound on interest rates

JEL Classification: E3, E4, E5, E6