Overcoming the zero bound on nominal interest rates with negative interest on currency: gesell's solution *

The paper considers two small analytical models, one Old‐Keynesian, the other New‐Keynesian, possessing equilibria where nominal interest rates at all maturities can be stuck at their zero lower bound. When the authorities remove the zero nominal interest rate floor by adopting an augmented monetary rule that systematically keeps the nominal interest rate on base money at or below the nominal interest rate on non‐monetary instruments, the lower bound equilibria are eliminated, thus allowing an economic system to avoid or escape from the trap. This involves paying negative interest on currency, ie, imposing a ‘carry tax’ on currency, an idea first promoted by Gesell.