The Cost of Overcoming the Zero Lower-Bound: A Welfare Analysis
To broaden the operational scope of monetary policy, several authors suggest cash abolition as an appropriate means of breaking through the zero lower-bound. We argue that the welfare costs of bypassing the zero lower-bound by getting rid of cash entirely are analytically equivalent to negative inte...
| Main Authors: | , , |
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| Format: | Article |
| Language: | English |
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MDPI AG
2019-07-01
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| Series: | Economies |
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| Online Access: | https://www.mdpi.com/2227-7099/7/3/67 |
| _version_ | 1818000480632045568 |
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| author | Gerhard Rösl Franz Seitz Karl-Heinz Tödter |
| author_facet | Gerhard Rösl Franz Seitz Karl-Heinz Tödter |
| author_sort | Gerhard Rösl |
| collection | DOAJ |
| description | To broaden the operational scope of monetary policy, several authors suggest cash abolition as an appropriate means of breaking through the zero lower-bound. We argue that the welfare costs of bypassing the zero lower-bound by getting rid of cash entirely are analytically equivalent to negative interest rates on cash holdings. Using a money-in-the-utility-function model, we measure in two ways the welfare loss consumers as money holders would be forced to bear once the zero lower-bound is broken: in terms of the amount needed to compensate consumers (compensated variation), and as excess burden (deadweight loss) imposed on the economy as a whole. We calibrated the model for the euro area and for Germany. Our findings suggest that the welfare losses of negative interest rates incurred by consumers as holders of cash and transaction balances (M3) are large and enduring, notably if implemented in the current low-interest rate environment. |
| first_indexed | 2024-04-14T03:22:10Z |
| format | Article |
| id | doaj.art-e34dc79545044661a94699dc41e94f9f |
| institution | Directory Open Access Journal |
| issn | 2227-7099 |
| language | English |
| last_indexed | 2024-04-14T03:22:10Z |
| publishDate | 2019-07-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Economies |
| spelling | doaj.art-e34dc79545044661a94699dc41e94f9f2022-12-22T02:15:17ZengMDPI AGEconomies2227-70992019-07-01736710.3390/economies7030067economies7030067The Cost of Overcoming the Zero Lower-Bound: A Welfare AnalysisGerhard Rösl0Franz Seitz1Karl-Heinz Tödter2Faculty of Economics, Technical University of Applied Sciences (OTH) Regensburg, 93053 Regensburg, GermanyFaculty of Economics, Technical University of Applied Sciences (OTH) Amberg-Weiden, 92637 Weiden, GermanyFormerly Research Centre, Deutsche Bundesbank, 60431 Frankfurt am Main, GermanyTo broaden the operational scope of monetary policy, several authors suggest cash abolition as an appropriate means of breaking through the zero lower-bound. We argue that the welfare costs of bypassing the zero lower-bound by getting rid of cash entirely are analytically equivalent to negative interest rates on cash holdings. Using a money-in-the-utility-function model, we measure in two ways the welfare loss consumers as money holders would be forced to bear once the zero lower-bound is broken: in terms of the amount needed to compensate consumers (compensated variation), and as excess burden (deadweight loss) imposed on the economy as a whole. We calibrated the model for the euro area and for Germany. Our findings suggest that the welfare losses of negative interest rates incurred by consumers as holders of cash and transaction balances (M3) are large and enduring, notably if implemented in the current low-interest rate environment.https://www.mdpi.com/2227-7099/7/3/67zero lower-boundnegative interest ratesmoney in utilitywelfare losscompensating variationdeadweight loss |
| spellingShingle | Gerhard Rösl Franz Seitz Karl-Heinz Tödter The Cost of Overcoming the Zero Lower-Bound: A Welfare Analysis Economies zero lower-bound negative interest rates money in utility welfare loss compensating variation deadweight loss |
| title | The Cost of Overcoming the Zero Lower-Bound: A Welfare Analysis |
| title_full | The Cost of Overcoming the Zero Lower-Bound: A Welfare Analysis |
| title_fullStr | The Cost of Overcoming the Zero Lower-Bound: A Welfare Analysis |
| title_full_unstemmed | The Cost of Overcoming the Zero Lower-Bound: A Welfare Analysis |
| title_short | The Cost of Overcoming the Zero Lower-Bound: A Welfare Analysis |
| title_sort | cost of overcoming the zero lower bound a welfare analysis |
| topic | zero lower-bound negative interest rates money in utility welfare loss compensating variation deadweight loss |
| url | https://www.mdpi.com/2227-7099/7/3/67 |
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