contribute over time to the formation of asset price bubbles. However, increases in house and equity prices have thus far remained moderate in most NIRP economies.

NIRP raise the question of how low negative rates can go before market distortions become significant enough to threaten financial stability. At the extreme, if central banks pushed policy rates too far into negative territory, there is a risk that large sectors of the economy could become cash-based. While some central banks have reduced their policy rates below -0.5 percent without any easily discernible financial market distortions, it is unclear whether rates could go much lower, or for a prolonged period, without raising financial stability concerns.

**_What are the implications of NIRP for emerging market and developing countries (EMDEs)?_** As the United States embarks on a gradual normalization of monetary policy, accommodative monetary policies, including NIRP, by other major central banks could help contain the ensuing increase in global interest rates and support demand for riskier, higher-yielding assets, including those of EMDEs. An event study shows that the responses of EMDE assets to NIRP announcements is on average broadly consistent with expectations: currencies of EMDEs appreciated, bond spreads declined, and equity prices increased on the day of the announcement. The average impact on EMDEs is also directionally consistent with previous estimates for QE policies by major central banks. While NIRP, as other unconventional monetary policies in major advanced economies, could have immediate positive effects on EMDE financial conditions, financial stability risks could combine with domestic vulnerabilities and lead to disruptions in capital inflows to EMDEs. EMDEs should rebuild the necessary policy buffers and implement policies to be able to effectively mitigate the impact of volatile capital flows.

**_What is the next frontier for monetary policy?_** Against the background of diminished long-term expectations for growth and inflation throughout the world economy **(** Figure 20), the introduction of NIRP has led to a vigorous debate about the next frontier for unconventional monetary policies. Reaching the effective floor of NIRP might not necessarily signal the limit of unconventional monetary policy experimentations. Expanding the size and coverage of asset purchase programs, setting higher inflation targets, targeting price levels instead of inflation, and transitioning into digital money or imposing a tax on money to eliminate the zero lower bound are other alternative tools that have been discussed recently.<sup>33</sup>

> 33 Buiter (2014), Bernanke (2016), Citi (2016c), Deutsche Bank (2016b), and Morgan Stanley (2016b) present more detailed discussions of the “helicopter money”. The feasibility of a tax on money has also been subject to debate in academic circles as a way to overcome the zero bound on interest rates (Goodfriend 2000 and 2002; Buiter and Panigirtzoglou 2003; Ilgmann and Menner 2011). Some studies also analyze the costs and benefits of phasing out paper currency as one way to eliminate the zero bound in interest rates (Agarwal and Kimball 2015). Rogoff (2014), for instance, suggests that the phasing-out procedure could begin with large-denomination notes, extended to others except small coins and bills, and finally abolishing the smallest ones. Buiter (2009) also argues that issuing only small notes such as 5 dollar bills would increase the cost of holding cash sufficiently to shift the effective lower bound to a deeper negative value.

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