Recently, I discovered that the debate on possibly removing the zero lower bound on nominal interest rates is quite hot in some blog circles in the US. For example, Miles Kimball is writing a lot about it these days, and I thought I would chime in with a piece I did on the issue a few years ago. It was written for a students’ blog at my department in Danish, and took the form of a run through of the arguments as Willem Buiter had presented them. Hence the title “Willem and the negative nominal interest rates”. Actually, Miles Kimball encouraged me to translate the Danish version, and I thank him for providing me with a rough Google-based translation, which I refined.
The piece is a bit heavy on footnotes, so I have chosen to post it as a pdf file. So, with little further ado, here is my piece on Buiter’s three proposals for eliminating the zero lower bound, with particular emphasis on the one drawing on Robert Eisler’s idea of two coexisting currencies: One physical and one virtual. An appropriate exchange rate policy then secures that a negative nominal interest rate rate becomes feasible on the virtual currency. If main transactions in the economy is carried out by virtual currency, expansionary policy can prevail.
Willem and the Negative Nominal Interest Rate (pdf, 200 kb)
© Henrik Jensen, March 2010
Still seems to me like a great idea.