The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
There has been much discussion about eliminating the 'zero lower bound' by eliminating paper
currency. But such a radical and difficult approach as eliminating paper currency is not necessary.
Much as during the Great Depression-when countries were able to revive their economies by going
off the gold standard-all that is needed to empower monetary policy to cut interest rates as much as
needed for economic stimulus now is to change from a paper standard to an electronic money
standard, and to be willing to have paper currency go away from par. This paper develops the idea
further and shows how such a mechanism can be implemented in a minimalist way by using a
time-varying paper currency deposit fee between private banks and the central bank. This allows the
central bank to create a crawling-peg exchange rate between paper currency and electronic money;
the paper currency interest rate can be either lowered below zero or raised above zero. Such an ability to
vary the paper currency interest rate along with other key interest rates, makes it possible to stimulate
investment and net exports as much as needed to revive the economy, even when inflation, interest rates,
and economic activity are quite low, as they are currently in many countries. The paper also examines
different options available to the central bank to return to par when negative interest rates are no longer
needed, and the associated implications for the financial sector and debt contracts. Finally, the paper
discusses various legal, political, and economic challenges of putting in place such a framework and how
policymakers could address them.