Typography

This continues a series of posts ( 1 , 2 , 3 ) I've been writing that tries to improve on Indian PM Narendra Modi's clumsy demonetization, or what I prefer to call a policy of surprise note swaps. The main goal of Modi's demonetization (i.e. note swapping) is to attack holdings of so-called "black money," or unaccounted cash. The problem here is that to have a genuine long-run effect on the behavior of illicit cash users, a policy of demonetization needs to be more than a one-off game. It needs to be a repeatable one. A credible threat of a repeat swap a few months down the road ensures that stocks of licit money don't get rebuilt after the most recent swap. If that threat isn't credible, then people will simply go back to old patterns of cash usage. It's worth pointing out that the idea of behind demonetization precedes Modi by many decades. In a 1976 article entitled Calling in the Big Bills and a 1980 a follow-up How to Make the Mob Miserable , Jam...

The 1995 British two pound "Dove" coin The Bank of England's chief economist Andrew Haldane recently called for central banks to think more imaginatively about how to deal with the technological constraint imposed by the zero lower bound on interest rates. Haldane says that the lower bound isn't a passing problem. Rather, there is a growing probability that when policy makers need three percentage points of headroom to cushion the effects of a typical recession, that headroom just won't be there. Haldane pans higher inflation targets and further quantitative easing as ways to slacken the bound, preferring to focus on negative interest rates on paper currency, a topic which gets discussed often on this blog. He mentions the classic Silvio Gesell stamp tax (which I discussed here ), an all out ban on cash as advocated by Ken Rogoff, and Miles Kimball's crawling peg (see here ). According to Haldane, the problem with Gesell's tax, Rogoff's ban ( pdf ), a...

This post is about the Alberta Prosperity Certificate , one of the world's stranger monetary experiments. Issued in late 1936 and early 1937 by the newly-elected Alberta government, these monetary instruments are the largest-scale example of Silvio Gesell's "shrinking money," or stamp scrip, in action. Gesell, a German business man and self taught economist, had written a treatise in 1891 in which he described a currency that depreciated in value, thus preventing hoarding and encouraging spending. To make this more interesting, let's jump forward in time. In 2014, Greece's Finance Minister Yanis Varoufakis wrote a blog post that described a new Greek financial instrument that could be used to make payments while circulating in parallel with the already-existing euro. Varoufakis's post, combined with constant rumors that Greece may be planning to issue its own parallel currency in order to make internal payments,* means that a revisitation of Alberta...

For lazy central bankers, this post describes three lite strategies for getting interest rates below the zero lower bound. Rather than requiring drastic action, these methods can be quickly deployed without having to spend too much energy — leaving plenty of time for the afternoon squash game. 1) Let's start at the beginning. What is the zero lower bound? If a central bank reduces interest rates below 0% then banks will rapidly convert all their central bank deposits into cash. No point accepting a -2% return if you can get 0%, right? 2) The zero lower bound is a problem. From time to time, a central bank may need to venture into negative territory to hit its monetary policy targets. Cash impedes the smooth descent into negative territory. 3) We already have a few go-to plays for dealing with our inability to get below zero: quantitative easing , forward guidance , and fiscal policy , each with its own set of warts. While quantitative easing has become a popular tool over the last ...

Tyler Cowen and Scott Sumner discuss the idea of abolishing central bank-issued cash. The existence of cash can create problems for monetary policy. Say a central bank wants to reduce the rate it pays on central bank deposits to below zero. If it did so, everyone would immediately convert deposits into cash, since owning 0% yielding paper notes is better than owning an instrument that pays a penalty rate. There appears to be a zero-lower bound to the interest rate on deposits. Ban cash and you might remove that bound. Tyler points out that the alternative to an outright ban is to put a Silvio Gesell-style tax on cash that brings a bank note's yield to something below 0%. This way, no one will prefer cash to negative yielding deposits. But as he points out, this is slightly "goofy" since it requires serial numbers and scans on all paper notes. There is a simple alternative that doesn't require a ban, nor does it require that all cash carry sensors, serial numbers, or...