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Could a cashless economy help central banks to use negative interest rates?
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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.
Read #IMFBlog on how to break through the zero lower bound on interest rates to stimulate the economy, while preserving the role of cash. https://t.co/WpU3mo4ksV pic.twitter.com/ZLi5LMYQHj
— IMF (@IMFNews) February 10, 2019
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.
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