Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/256999 
Year of Publication: 
2019
Citation: 
[Journal:] Economies [ISSN:] 2227-7099 [Volume:] 7 [Issue:] 3 [Article No.:] 67 [Publisher:] MDPI [Place:] Basel [Year:] 2019 [Pages:] 1-18
Publisher: 
MDPI, Basel
Abstract: 
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.
Subjects: 
zero lower-bound
negative interest rates
money in utility
welfare loss
compensating variation
deadweight loss
JEL: 
E41
E21
E58
I3
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

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