On the monetary policy side, one of the most pressing issues for monetary policymakers today is the zero (or close to zero) lower bound (ZLB) on interest rates. At root, the ZLB arises from a technological constraint on the ability to pay or receive interest on physical cash, whether positive or negative. In principle, a widely-used digital currency could mitigate, if not eliminate, that technological constraint by enabling interest rates to be levied on retail monetary assets. How far it is able to do so will depend on the supply of physical cash to the public, as well as any impact of the new regime on the financial system.
The potential macro-economic benefits of easing the ZLB constraint appear to be significant. Studies prior to the global financial crisis suggested the ZLB would bind infrequently and have only a modest macroeconomic cost. With global real interest rates having since fallen, recent work suggests the ZLB could bind much more frequently, between 20 and 40% of the time. That, in turn, could lead to significant shortfalls in average output relative to potential (of around 2%) and average inflation relative to target (of as much as 2pp).
The macro-economic costs of the ZLB constraint require thorough exploration. To be clear, what I am discussing here is a structural shift in the monetary regime and carries no implications for the costs and benefits of negative interest rates in the shorter-term. And these costs can of course be mitigated in others ways, including through unconventional monetary policy tools and activist fiscal policy.
Nonetheless, I believe it is important these potentially large macro-economic benefits of a digital currency are explored when evaluating the case for a new monetary order. So far, that has not been the case.