simply are not coded properly at present to process transactions based on instruments with negative rates. all of these are, of course, transitional problems, but they might be sufficient to make a move to negative rates difficult to implement on short notice. • raising the equilibrium real rate : an even more ambitious approach to ease the constraints posed by the zero lower bound would be to take steps aimed at raising the equilibrium real rate. for example, expansionary fiscal policy would boost the equilibrium real rate. in particular, the need for more modern infrastructure in many parts of the american economy is hard to miss. and we should not forget that additional effective investment in education also adds to the nation ’ s capital. as another example, numerous studies of the effects of the federal reserve ’ s asset purchases suggest that these operations have reduced the level of the term premium embedded in long - term interest rates. if aggregate demand depends primarily on the level of long - term interest rates, it might be possible, in principle, to maintain a level of long - term rates consistent with full employment and stable prices by lowering term premiums while at the same time raising the level of short - term rates by a compensating amount. this result could be accomplished, for example, if the treasury took steps to shorten the average maturity of treasury debt outstanding or, alternatively, if the federal reserve maintained large holdings of long - term assets. • eliminating the zlb associated with physical currency : while the european experience suggests that interest rates can be pushed somewhat below zero, the existence of physical currency likely still limits how deeply interest rates can be pushed into negative territory. that observation has led some to ask whether it would it be possible for the financial system to operate effectively without physical currency provided by the central bank. this is a theoretical question that has fascinated economists for decades and, with advances in technology, could possibly have practical implications as well. indeed, the scandinavian countries have embraced the development of new payments technologies that seem to be reducing the need for physical currency for transactions in those countries. 12 nonetheless, a transition to a cashless economy in the united states seems very far off ; indeed, u. s. currency outstanding has been increasing relative to nominal gross domestic product over recent decades, driven importantly by foreign demands for u. s. bank notes. moreover, to eliminate the zlb associated with physical currency by going cashless, countries would need to transition to an economy that did not require widespread use of physical currency, and central banks in those

stanley fischer : monetary policy, financial stability, and the zero lower bound speech by mr stanley fischer, vice chair of the board of governors of the federal reserve system, at the annual meeting of the american economic association, san francisco, california, 3 january 2016. * * * i am grateful to james clouse, william english, thomas laubach, nellie liang, david lopez - salido, jeff marquardt, david mills, fabio natalucci, david reifschneider, stacey tevlin, david wilcox, and paul wood for their assistance. i have benefited also from discussions with john williams. my comments today reflect my own views and are not an official position of the board of governors or the federal open market committee. thank you. it is a great pleasure to be here today and to participate in this panel together with such a distinguished group. much has happened in the world of central banking in the past 10 years. the list of challenges we face is long and includes fundamental issues such as lender - of - last - resort policies in the modern financial system, the role of central banks in the supervision of the financial sector, and the appropriate role of forward guidance in monetary policy communications. those are the topics i will not discuss today. rather, i will focus primarily on three related issues associated with the zero lower bound ( zlb ) on nominal interest rates and the nexus between monetary policy and financial stability : first, whether we are moving toward a permanently lower long - run equilibrium real interest rate ; second, what steps can be taken to mitigate the constraints imposed by the zlb on the shortterm interest rate ; and, third, whether and how central banks should incorporate financial stability considerations in the conduct of monetary policy. are we moving toward a world with a permanently lower long - run equilibrium real interest rate? we start with a key question of the day : are we moving toward a world with a permanently lower long - run equilibrium real interest rate? the equilibrium real interest rate – more conveniently known as r * – is the level of the short - term real rate that is consistent with full utilization of resources. it is often measured as the hypothetical real rate that would prevail in the long - run once all of the shocks affecting the economy die down. 1 in terms of the federal reserve ’ s approach to monetary policy, it is the real interest rate at which the economy would settle at full employment and with inflation at 2 percent – provided the economy is