Imposing Negative Interest on Money in Economic Systems

Negative interest on money is considered as an alternative instrument of expansionary macroeconomic policy. The mechanism of imposing negative interest on money is the following. The holder of money should periodically pay interest on his money holdings to monetary authorities. In this way negative interest on money could stimulate economic agents to consume and invest and also prevent the withdrawal of money from economic circulation in recessions. In contrast to other instruments of expansionary policy, negative interest on money does not imply an increase in money supply by central banks, thus an inflation risk is lower. The purpose of this paper is to investigate the effects of this policy tool on major macroeconomic indicators. In the framework of search-theoretic model it was found that negative interest on money is able to increase aggregate output and lower unemployment without inflationary pressure.