The cost of overcoming the zero lower-bound: A welfare analysis

Artikel

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Economies ; ISSN: 2227-7099 ; Volume: 7 ; Year: 2019 ; Issue: 3 ; Pages: 1-18 ; Basel: MDPI

Classification and Topics

• Classification: Wirtschaft ; Demand for Money ; Macroeconomics: Consumption; Saving; Wealth ; Central Banks and Their Policies
• Subject: zero lower-bound ; negative interest rates ; money in utility ; welfare loss ; compensating variation ; deadweight loss

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Rösl, Gerhard ; Seitz, Franz ; Tödter, Karl-Heinz
• Event: Veröffentlichung
• (who): MDPI
• (where): Basel
• (when): 2019

Further information

• DOI: doi:10.3390/economies7030067
• Handle: http://hdl.handle.net/10419/256999
• Last update: 10.03.2025, 11:41 AM CET