Typography

Last week I asked whether the Federal Reserve could get rid of the $100 bill. This week let's discuss whether it should get rid of the $100. I don't think so. The U.S. provides the world with a universal backup monetary system. Removing the $100 would reduce the effectiveness of this backup. Earlier this week the New York Times took up the knell for eliminating high value bank notes, echoing Larry Summers' earlier call to kill the $100 in order to reduce crime which in turn was a follow up on this piece from Peter Sands. More specifically, Summers says that "removing existing notes is a step too far. But a moratorium on printing new high denomination notes would make the world a better place." As an aside, I just want to point out that Summers' moratorium is an odd remedy since it doesn't move society any closer to his better place,  a world with less crime. A moratorium simply means that the stock of $100 bills is fixed while their price is free to f...

Thomas Jordan, Chairman of the Governing Board of the Swiss National Bank Negative interests rates are the shiny new thing that everyone wants to talk about. I hate to ruin a good plot line, but they're actually kind of boring; just conventional monetary policy except in negative rate space. Same old tool, different sign. What about the tiering mechanisms that have been introduced by the Bank of Japan, Swiss National Bank, and Danmarks Nationalbank? Aren't they new? The SNB, for instance, provides an exemption threshold  whereby any amount of deposits that a bank holds above a certain amount is charged -0.75% but everything within the exemption incurs no penalty. As for the Bank of Japan, it has three tiers : reserves up to a certain level (the 'basic balance') are allowed to earn 0.1%, the next tier earns 0%, and all remaining reserves above that are docked -0.1%. But as Nick Rowe writes , negative rate tiers—which can be thought of as maximum allowed reserves—are si...

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...

Unfathomable Depths by Ibai Acevedo Denmark's Nationalbank and the Swiss National Bank are the world's most interesting central banks right now. As the two of them push their deposit rates to record low levels of -0.75%, they're testing the market's limit for bearing negative nominal interest rates. The ECB takes second prize as it has been maintaining a -0.2% deposit rate since September 2014. At some point, investors will flee deposits into 0%-yielding cash. This marks the effective lower bound to rates. Has mass paper storage begun? The last time I ran through the data was in my  monetary canaries post , which was inconclusive. Let's take a quick glance at the updated data. To gauge where we are relative to the effective lower bound, I'm most interested in the demand for large denomination notes, which bear the lowest costs of storage. Once a central bank reduces its deposit rate so deep into negative territory that the carrying cost of deposits exceeds the...

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 ...

Two things worth noting: As many of you know by now, the Swiss National Bank (SNB), Switzerland's central bank, just reduced the rate that banks earn on deposits held at the SNB by half a percentage point to -0.75% (from -0.25%). The SNB had only recently instituted a negative deposit rate, having reduced it to -0.25% from 0% this December. The SNB will also be targeting a 3-month LIBOR rate of -1.25% to -0.25%, down from the previous range of -0.75% to +0.25% The SNB issues the world's largest paper bearer note denomination, the hefty CHF 1000 note (pictured above). It's worth around US$1143. The first is significant because as yet, no central bank has ever brought rates this deep into negative territory. The ECB's current deposit rate is set at -0.2% while Denmark's central bank, the Danmarks Nationalbank (DNB), applied a negative deposit rate of -0.2% on deposits that banks placed with the DNB in 2012. Neither of these top the SNB's ultra-low -0.75% rate. T...