International Monetary Fund (IMF) economists have floated the prospect of central banks creating two separate currencies - e-money and cash - as a way to enable the negative interest rates that will likely be needed to combat future recessions.
A decade ago many central banks reduced policy interest rates to zero to tackle the global financial crisis. But, with rates still low, these banks do not have the room to make the same kind of cuts again - unless they find a way to get to negative interest rates.
Getting rid of cash is the most commonly cited way of achieving this. The IMF says that, without cash, "depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy."
But, phasing out cash - at least in the short term - is a pipe dream for almost all countries. Instead, the IMF wonks say that central banks could split the monetary base into two separate local currencies - cash and e-money.
E-money would pay the policy rate of interest and cash would have an exchange rate against e-money.
Explains the IMF: "This conversion rate is key to the proposal. When setting a negative interest rate on e-money, the central bank would let the conversion rate of cash in terms of e-money depreciate at the same rate as the negative interest rate on e-money. The value of cash would thereby fall in terms of e-money."
For example, the lender could announce a negative three per cent interest rate on a deposit of 100 dollars today and the central bank could announce that cash-dollars would become a separate currency that would depreciate against e-dollars by three per cent per year.
The conversion rate of cash-dollars into e-dollars would hence change from 1 to 0.97 over the year. After a year, there would be 97 e-dollars left in the bank account. If the customer instead took out 100 cash-dollars today and kept it safe at home for a year, exchanging it into e-money after that year would also yield 97 e-dollars.
"At the same time, shops would start advertising prices in e-money and cash separately, just as shops in some small open economies already advertise prices both in domestic and in bordering foreign currencies. Cash would thereby be losing value both in terms of goods and in terms of e-money, and there would be no benefit to holding cash relative to bank deposits," says the IMF.
The economists say that the dual currency system could be rolled out with small changes to central bank operating frameworks, but concede that monetary law questions would need to be addressed and that an "enormous communications effort" would be needed.
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