Monetary Policy with Negative Interest Rates: Decoupling Cash from Electronic Money

Abstract

Monetary policy space remains constrained by the lower bound in many countries, limitingthe policy options available to address future deflationary shocks. The existence of cashprevents central banks from cutting interest rates much below zero. In this paper, we considerthe practical feasibility of recent proposals for decoupling cash from electronic money toachieve a negative yield on cash which would remove the lower bound constraint onmonetary policy. We discuss how central banks could design and operate such a system, andraise some unanswered questions.

Keywords: Central banks and their policies, Monetary policy, Negative interest rates, Currencies, Zero lower bound; Monetary policy framework, Dual local currency regime, Legal tender, Zero lower bound, Monetary policy framework, Monetary Policy (Targets, Instruments, and Effects)

JEL Classification: E42, E52, E58