Here is a link to Dylan Matthew’s extremely skillful writeup of his interview with me last Thursday (November 14, 2013) on eliminating the zero lower bound on nominal interest rates by making electronic money the unit of account and legal tender. Dylan’s piece provides the most accessible explanation of the nuts and bolts of my proposal for how to get the negative interest rates I have argued we desperately need in our monetary policy toolkit.
My answer to the question in Wonkblog’s title is
- Yes, by changing the way we deal with paper currency, we can safely have inflation hover around zero, instead of hovering around 2% per year.
- No, we can’t prevent all recessions, but we can make them short if we are prepared to use negative interest rates. If we repeal the zero lower bound, we should be able to do at least as well as we did during what macroeconomists called The Great Moderation: the period from the mid-1980s to the first intimations of the Financial Crisis that culminated in 2008.
- Indeed, with sound policy we should be able to stabilize the economy somewhat better than during The Great Moderation, both because we keep learning more about the best way to conduct monetary policy and because eliminating the zero lower bound makes it safe to strengthen financial regulation and thereby prevent some of the shocks that might cause recessions.