Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/206540 
Authors: 
Year of Publication: 
2019
Series/Report no.: 
DICE Discussion Paper No. 327
Publisher: 
Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE), Düsseldorf
Abstract: 
The elimination of large-denomination banknotes is one of several options to relax the effective-lower-bound constraint on nominal interest rates. We explore timing issues associated with the calling-in of large notes from a central banker's perspective and employ an optimal stopping model to show how the volatility and the expected path of the natural rate of interest determine an optimal timing strategy. Our model shows that such a strategy can involve a wait-and-see component analogously to an optimal exercise rule for a perpetual American option. In practice, a wait-and-see component might induce a central banker not to call in large notes until the natural rate has fallen to an exceptionally low level.
Subjects: 
cashless economy
phase-out of paper currency
wait-and-see policy
optionvalue
JEL: 
E42
E58
ISBN: 
978-3-86304-326-1
Document Type: 
Working Paper

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