Negative interest rates become ‘feasible’ with the elimination of cash – paper

A working paper published by the IMF has said “de-cashing” could make negative interest rates a “feasible option” while also improving the transmission mechanism of monetary policy in general.

The paper, authored by Alexei Kireyev, examines the macroeconomic impacts of removing cash from circulation and replacing it with convertible deposits.

Kireyev argues currency has “largely” lost its role in monetary policy – particularly in developed countries – as the amount of currency in circulation has “no impact on inflation”.

“In principle, the transmission of monetary impulses from the policy rate to inflation may become easier as all rates may react faster to the changes in the policy rate, as economic agents would have fewer non-interest bearing assets in the form of saved currency,” he says.

Kireyev also argues negative interest rate policy becomes a “feasible option” for monetary policy if savings in physical currency are “discouraged and substantially reduced.”

However, he goes on to note that even where cash and prepaid debit cards are “eliminated”, negative rates would likely still be “highly controversial”.