If we
allow negative interest rates on savings and limit the use of banknotes and
coins, then we could probably solve the problem of deflation. Nowadays, people
have more wealth in the form of deposits than in the form of banknotes and
coins. Deflation is easy to lead an economy to a recession, because once there
is a deflation, the expectation of further will lower people's consumption and
hurt the economic output as demand drops. However, if we allow negative
interest rates on savings, people will probably have the incentives to spend
their money. Moreover, as we limit the use of banknotes and coins, cash becomes a type of security
with a fixed nominal value rather than money. People have to purchase
necessities even if they know these necessities could be cheaper in the future,
because without these necessities, their life standards will be affects. To
conclude, if we can limit the use of cash and allow negative saving interest
rates on demand deposits, then a significant drop in consumption once a
deflation occurs could possibly be prevented.
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