Economics Working Paper 19101
Abstract: If the U.S. economy encounters another severe adverse shock in coming years, will the Federal Reserve be able to provide sufficient monetary stimulus to preserve price stability and foster economic recovery? Our empirical analysis indicates that QE3 was not an effective form of monetary stimulus and that unconventional monetary policies in the Eurozone and in Japan have proven to be similarly ineffectual. Consequently, the Federal Reserve should bolster the effectiveness of monetary policy by taking active steps to establish U.S. digital cash. In the near term, such steps would include launching an instant payments system and welcoming the establishment of narrow banks. Consumers and firms would remain free to use paper cash, but a graduated system of transfer fees would eliminate the lower bound on nominal interest rates. Thus, the Federal Reserve would no longer rely on unconventional tools, and its monetary policy framework would become more systematic, transparent, and effective.