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Could a cashless economy help central banks to use negative interest rates?

Geoff Riley

10th February 2019

This IMF blog (published February 2019) argues that a dual currency system involving e-money and cash might give central banks for more freedom to cut interest rates below zero as a policy response to a future shock.

Few central banks at present have moved nominal interest rates back towards previously normal levels (for the UK that might be between 3-5% when policy interest rates remain at 0.75%) to allow themselves some wriggle room when there is an economic downturn.

In countries where cash in circulation is a significantly smaller percent of GDP (such as Sweden and Norway) it would - in theory - be relatively straightforward to impose negative interest rates on e-cash held in deposit accounts.

However "cash is a free option on zero interest, and acts as an interest rate floor." The accompanying chart shows the large differences in the use of cash across developed OECD countries - in Sweden, currency in circulation is around 1 percent of GDP, whereas in Japan is it closer to 20 percent.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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