I missed this the first time Kimball posted it.

The bottom line is that all we have to do to give the Fed (and other central banks) unlimited power to lower short-term interest rates is to demote paper currency from its role as a yardstick for prices and other economic values—what economists call the “unit of account” function of money. Paper currency could still continue to exist, but prices would be set in terms of electronic dollars (or abroad, electronic euros or yen), with paper dollars potentially being exchanged at a discount compared to electronic dollars. More and more, people use some form of electronic payment already, with debit cards and credit cards, so this wouldn’t be such a big change. It would be a little less convenient for those who insisted on continuing to use currency, but even there, it would just be a matter of figuring out with a pocket calculator how many extra paper dollars it would take to make up for the fact that each one was worth less than an electronic dollar. That’s it, and we wouldn’t have to worry about the Fed or any other central bank ever again seeming relatively powerless in the face of a long slump.

…for paper dollars, the interest rate would be made at least another 1% per year lower by having the discount for paper dollars gradually change over time.

I got to that piece from this post. Thanks to Tyler Cowen for the pointer.

A country that is ready to stop hyperinflating will often go for a currency reform. We cut the budget deficit so that we have to stop printing so much money. And we issue a new shekel, which is worth 100 of the old shekels. We phase out the old shekels.

Kimball’s proposal made me think of a currency reform for when inflation is too low. Imagine issuing a new dollar that eventually will trade at parity with old dollars. However, in the first month, for currency exchanges only, the government offers 10 new dollars for 9 old dollars. The next month, it offers 9.99 in new dollars for 9 old dollars. The following month, the exchange rate is 9.98 to 9. And so on, until the parity value is reached.

With this exchange policy, the interest rate on old currency will effectively be negative. Thus, you avoid the zero lower bound on interest rates.

I am not advocating this. I am suggesting that it is perhaps related, or even equivalent, to Kimball’s proposal.