Monday 29 February 2016

Negative saving interest rates and limiting cash use can mitigate the negative effects of deflation

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.

No comments:

Post a Comment