Advancing the monetary policy toolkit through outright transfers and tiered reserve remuneration

While advanced economies’ asset purchase programs have supported prices, growth, and employment, they have also contributed to rising financial stability risks and increasing wealth inequality. This chapter argues that reserve currency issuing central banks should con- sider adding outright transfers to the monetary policy toolkit at the effective lower bound, as such transfers would be both more equitable and more effective in achieving monetary policy objectives than asset purchases and negative interest rates. It shows that concerns pertaining to future policy solvency and negative central bank equity, which also arise in the context of asset purchases and direct monetary financing, need to be taken seriously but can be addressed through a careful assessment of a central bank’s loss absorbing capacity and, if need be, tiered reserve remuneration policies. It also spells out the key differences to a debt or money financed fiscal stimulus, which are particularly pronounced in a currency union without a central fiscal capacity. The chapter concludes by discussing broader institutional, le- gal, and political aspects of such a monetary policy tool.