Breaking Through the Zero Lower Bound

IMF Working Papers, October 23, 2015

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Change from a paper standard to an electronic money standard while allowing paper currency to go away from par.
Implement a minimalist mechanism: a time-varying paper currency deposit fee between private banks and the central bank.
Create a crawling-peg exchange rate between paper currency and electronic money via the deposit fee.
Permit the paper currency interest rate to be lowered below zero or raised above zero by varying the deposit fee.

Enables monetary policy to cut interest rates as much as needed for economic stimulus even when inflation, interest rates, and economic activity are quite low.
Makes it possible to stimulate investment and net exports as much as needed to revive the economy.
Analogous policy leverage to past episodes (for example, going off the gold standard during the Great Depression) but achieved by shifting the unit of money from paper to electronic form rather than eliminating paper currency outright.

Examines different options available to the central bank to return paper currency to par when negative interest rates are no longer needed.
Discusses associated implications for the financial sector and debt contracts stemming from transitions between paper and electronic money rates.

Identifies legal, political, and economic challenges of putting such a framework in place.
Discusses how policymakers could address these legal, political, and economic challenges.

Subject: Banking, Currencies, Digital currencies, Financial services, Inflation, Monetary policy, Money, Negative interest rates, Prices, Technology, Zero lower bound
Keywords: Currencies, deposit fee, Digital currencies, electronic money, Global, Inflation, inflation rate, monetary policy, negative interest rates, paper currency, paper currency interest rate, rate of return, target rate, unit of account, WP, Zero lower bound