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...

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Bibliographic Details
Published in:Economies 2019-09, Vol.7 (3), p.1-18
Main Authors: Rösl, Gerhard, Seitz, Franz, Tödter, Karl-Heinz
Format: Article
Language:English
Subjects:
Bank deposits
Central banks
compensating variation
Costs
deadweight loss
Deflation
Economic crisis
Eurozone
Interest income
Interest rates
Monetary policy
money in utility
negative interest rates
welfare loss
zero lower-bound
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Summary: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.
ISSN:2227-7099
2227-7099
DOI:10.3390/economies7030067