Postscript to the previous post on the ZLB.
The practical challenges of devising watertight legal reform to eliminate cash and its near substitutes, both currently invented and yet to be, or to reform them so that a variable negative interest rate can be set, seem like a tall order.
Much easier is simply to raise the inflation target, as suggested previously by Olivier Blanchard, Krugman and others. Perhaps by 2 percentage points. To be done when interest rates would otherwise – under the old target – lifted clear enough of the zero bound that the new target can be achieved within a realistic time frame. And perhaps reviewed at low frequency as evidence on changes in the natural rate accumulates.
Higher inflation imposes extra costs on the economy as the private sector struggles to insulate themselves from it. And hits the poor hardest, since they are typically less adept at indexing themselves.
But then part of this cost – erosion of the value of money – is imposed by negative rates anyway.
And to conclude with a rather woolly argument, though felt keenly myself, higher inflation would be a much easier thing to explain and communicate than innovative, invasive reform of monetary institutions that not all on the econosphere grasp readily. And being more easily communicable, I conjecture that it would be easier to build a lasting constituency for higher but stable inflation.