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

1
Faculty of Economics, Technical University of Applied Sciences (OTH) Regensburg, 93053 Regensburg, Germany
2
Faculty of Economics, Technical University of Applied Sciences (OTH) Amberg-Weiden, 92637 Weiden, Germany
3
Formerly Research Centre, Deutsche Bundesbank, 60431 Frankfurt am Main, Germany
*
Author to whom correspondence should be addressed.
The views in this article are not necessarily those of the Deutsche Bundesbank.
Economies 2019, 7(3), 67; https://doi.org/10.3390/economies7030067
Received: 5 March 2019 / Revised: 23 June 2019 / Accepted: 25 June 2019 / Published: 4 July 2019
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. View Full-Text
Keywords: zero lower-bound; negative interest rates; money in utility; welfare loss; compensating variation; deadweight loss zero lower-bound; negative interest rates; money in utility; welfare loss; compensating variation; deadweight loss
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Rösl, G.; Seitz, F.; Tödter, K.-H. The Cost of Overcoming the Zero Lower-Bound: A Welfare Analysis. Economies 2019, 7, 67.

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