Bleg: A negative OCR – how?

I like the idea of being able to keep cutting the OCR – even once it hits zero.  It doesn’t mean that market rates will be negative, that doesn’t make any sense – but it does mean that monetary policy can push banks to lower reserves and increase the amount of money in circulation.  This is useful if we think we are facing deflation and the OCR has already hit zero.

However, how would we make it work?  If we only said reserves were reserves when they are held by a central bank, there would be no (or little) incentive for retail banks to hold reserves in this fashion when there is a penatly interest rate.  But they could just “hide money under the pillow”.

As a result, any definition of reserves in this case needs to include money hidden under banks collective pillows.

Furthermore, we need to be careful about what we do class as reserves on the other side.  If we class bonds as reserves we are only letting banks either lend or take a penalty – if lending prospects are bad then the RBNZ would just be taking money off the bank, not so much of a good move in the face of the current credit crisis.  If banks buy bonds it is still “stimulatory” – so that is something we want to leave there.

So how do we capture non-active reserves?  Does the RBNZ have enough information to do this?  Does it have the right to do this?  I would love some advice.