Optimal timing of calling in large-denomination banknotes under natural rate uncertainty

Thomas Link

No 327, DICE Discussion Papers from Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE)

Abstract: The elimination of large-denomination banknotes is one of several options to relax the effective-lower-bound constraint on nominal interest rates. We explore timing issues associated with the calling-in of large notes from a central banker's perspective and employ an optimal stopping model to show how the volatility and the expected path of the natural rate of interest determine an optimal timing strategy. Our model shows that such a strategy can involve a wait-and-see component analogously to an optimal exercise rule for a perpetual American option. In practice, a wait-and-see component might induce a central banker not to call in large notes until the natural rate has fallen to an exceptionally low level.

Keywords: cashless economy; phase-out of paper currency; wait-and-see policy; optionvalue (search for similar items in EconPapers)
JEL-codes: E42 E58 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:dicedp:327

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