Monetary Policy in a Zero-Interest Rate Economy (Dallas Fed): The strategy for eliminating the zero bound, therefore, is to make money pay a negative nominal interest rate, by imposing some type of “carry tax” on currency and deposits. It’s easy to envision such a system with regard to deposits at the Federal Reserve or transactions deposits at banks; for the most part, the technology to implement such a system is already in place. A tax or fee on Reserve deposits of 1 percent per month, for example, would mean that those deposits, in effect, pay a nominal interest rate of roughly minus 12 percent. The technological difficulty lies mainly in imposing such a tax on currency. In the 1930s, Irving Fisher of Yale University, one of the greatest American economists, proposed such a system, in which currency had to be periodically ‘stamped’, for a fee, in order to retain its status as legal tender. The stamp fee could be calibrated to generate any negative nominal interest rate that the central bank desired. While the technology available for implementing such a system is more sophisticated today than in Fisher’s time, enforcement still seems a mammoth problem, involving physical modifications to currency and some means of tracking the length of time each piece spends in circulation. Given the technological hurdles involved in its implementation, a carry tax on money may not be feasible as a response to any events that might transpire in the next year, though it certainly merits study as a possible response to events that might transpire in the next decade.
Fed Explores Stamp Tax
