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

  • 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.

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Metadaten
Author:Gerhard RöslGND, Franz Seitz, Karl-Heinz Tödter
DOI:https://doi.org/10.3390/economies7030067
Parent Title (English):Economies
Publisher:MDPI
Document Type:Article
Language:English
Year of first Publication:2019
Release Date:2022/01/31
Tag:compensating variation; deadweight loss; money in utility; negative interest rates; welfare loss; zero lower-bound
Volume:7
Issue:3
Article Number:67
First Page:1
Last Page:18
Institutes:Fakultät Betriebswirtschaft
Begutachtungsstatus:peer-reviewed
OpenAccess Publikationsweg:Gold Open Access- Erstveröffentlichung in einem/als Open-Access-Medium
research focus:Produktion und Systeme
Licence (German):Creative Commons - CC BY - Namensnennung 4.0 International