The Cost of Overcoming the Zero Lower-Bound: A Welfare Analysis

Rösl, Gerhard and Seitz, Franz and Tödter, Karl-Heinz (2019) The Cost of Overcoming the Zero Lower-Bound: A Welfare Analysis. Economies, 7 (3). p. 67. ISSN 2227-7099

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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.

Item Type: Article
Subjects: Research Asian Plos > Multidisciplinary
Depositing User: Unnamed user with email support@research.asianplos.com
Date Deposited: 05 Jul 2023 05:12
Last Modified: 28 Oct 2024 08:22
URI: http://abstract.stmdigitallibrary.com/id/eprint/1295

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