Georgi Kantchev, Christopher Whittall and Miho Inada Write a Balanced Assessment of Negative Rates for the Wall Street Journal
I had a very interesting interview with Georgi Kantchev a bit ago that is nicely reflected in an August 8 Wall Street Journal article he wrote with Christopher Whittall and Miho Inada. Despite the negative tone of the headline, and its collection of person-in-the-street quotations from people horrified by negative interest rates, in its analysis, it is actually quite a nuanced and balanced article.
A. Consider the following pairs of quotations:
1a. Some economists now believe negative rates can have an unintended psychological effect by communicating fear over the growth outlook and the central bank’s ability to manage it.
“The signal to the consumer is that something is wrong—it’s a crisis measure,” says Carl Hammer, chief currency strategist at Swedish bank SEB.
1b. University of Michigan economist Miles Kimball believes rates should be lowered even deeper into negative territory. If people are getting scared by negative rates, he says, it is the fault of central banks’ inability to communicate effectively, not the policy itself.
“They should say that this is a normal tool of policy,” he says, “and then people wouldn’t freak out.”
2a. In Germany, Europe’s largest economy and a nation known for thrift, savings as a percentage of disposable household income rose to 9.7% in 2015, according to preliminary data from the OECD. That is the highest rate since 2010, and the OECD expects the savings rate to rise further this year, to 10.4%.
2b. In the broader eurozone, where saving isn’t as ingrained in the psyche as in Germany, the household savings rate has edged lower since negative interest rates were introduced in 2014.
3a. Yves Mersch, a member of the ECB’s executive board, said in June that it is possible “households are hoarding even more” because they need to save more to build up the same amount of wealth over the same time span.
3b. Peter Praet, the ECB’s chief economist, says the focus should also be on borrowers, who are more inclined to spend than savers, and are seeing a boost to their disposable income because ultralow rates reduce the cost of servicing debt.
B. In the second and third pairs of quotations, the authors of the article show an understanding of the principle I enunciated in “Even Central Bankers Need Lessons on the Transmission Mechanism for Negative Interest Rates”:
The Principle of Countervailing Wealth Effects: It is easy to forget about some of the wealth effects. Applying the general principle that all the wealth effects cancel–other than overall expansion of the economy and differences in the marginal propensity to consume across economic actors can help in making sure one hasn’t missed a wealth effect, much as double-entry accounting helps in making sure one doesn’t miss something. An example of a particularly large wealth effect that is easy to miss is that a fall in interest rates raises the present discounted value of household labor income. The other principle that helps to avoid missing a wealth effect is to remember that there is always another side to every borrowing-lending relationship. If the economic actor on one side of the borrowing-lending relationship gets a negative hit to effective wealth, the economic actor on the other side will get a positive boost to effective wealth–again with the exception of the overall expansion of the economy. …
I discussed this principle again in “Responding to Joseph Stiglitz on Negative Interest Rates”:
… because there are two parties to every borrower-lender relationship, what is a negative wealth effect to one party is a positive wealth effect to the other. And on the whole, borrowers–who tend to get a wealth effect boost from lower rates–are better spenders than lenders. So if all the wealth effects are accounted for rather than cherry-picking a wealth effect here or there, they will be in the direction of greater stimulus from lower rates. Here is the overall story about transmission mechanisms for lower rates, in the negative region as well as the positive region: In any nook or cranny of the economy where interest rates fall, whether in the positive or negative region, those lower interest rates create more aggregate demand by a substitution effect on both the borrower and lender, while other than any expansion of the economy overall, wealth effects that can be large for individual economic actors largely cancel out in the aggregate.
Anyone who discusses the effects of negative interest rates by talking only about lenders without talking about borrowers is missing at least half of the story. Georgi Kantchev, Christopher Whittall and Miho Inada avoid that mistake.
I give a non-obvious example of this principle of considering borrowers as well as lenders in “Responding to Joseph Stiglitz on Negative Interest Rates”:
…think of senior citizens who lend instead to the federal government. Lower interest rates reduce the deficit and tend to lead to more government spending fairly directly by deficit reduction rules biting less. Even though senior citizens have a high marginal propensity to consume, I think the effects of deficit numbers on government behavior make the effective marginal propensity to consume of the federal government out of a change in interest expense even higher. Those who like the idea of fiscal stimulus should be happy about this stimulus from negative interest rates–especially since the negative wealth effect is only for the relatively well-off senior citizens who are not just living on social security, but have interest income to live on on top of that.
C. You might be interested in the email I sent to Georgi:
Dear Georgi,
It was great talking to you. Let me try to remember all the links I promised you:
1. I have links to everything I have written (including two academic policy papers) on negative interest rates in this bibliographic post that I update every few weeks:
2. You can see the video of the afternoon session of the Brookings conference I mentioned here:
My 20 minute talk comes first, giving more background on my recommendations. You can hear reactions to what I said as well. The panel discussion after is where you can hear several people say that the interest rate movement in at least the case of Japan is small compared to other things going on.
3. The actual Brookings website for that conference has both the afternoon session and the morning session:
This morning session has a lot of excellent talks, including the heavy-duty talk by Massimo Rostagno about his work with coauthors looking at what the markets believe is the lower bound on interest rates and the value Massimo sees in having negative rates in order to lower the market’s beliefs about what the lower bound on interest rates is, which allows long-term rates affected by QE to fall further. We talked about this in the context of central bank communication policy and the value of telling the markets that you can and will take interest rates as low as necessary. (The key point of my work is that there is no lower bound on interest rates if a central bank uses an appropriate mix of policies.)
4. Here is Naranaya Kocherlakota (who recently stepped down as President of the Minneapolis Fed) saying that negative rates should be treated as a normal part of monetary policy as we discussed:
and here is my reaction:
I had forgotten that this was a few weeks before he started writing for Bloomberg View. Narayana Kocherlakota has written a lot about central bank communication and negative interest rates in his Bloomberg View columns:
5. Here is my advice that central banks should use the interest-on-reserves formula to effectively subsidize the provision of zero rates (rather than negative rates) to small household accounts:
6. Here is a relatively heavy-duty post taking on Mark Carney to argue that there are many, many channels through which cutting interest rates–including cutting interest rates in the negative region–will stimulate the economy:
Not all of these channels involve banks. So a low enough rate can get all needed stimulus even if banks are malfunctioning. (Of course, it is bad directly if banks are malfunctioning; I am just saying that monetary policy can do its most basic job even if they are.)
I also addressed this issue here:
7. On the evidence that negative interest rates have the usual effects of interest rate cuts on financial markets despite some commentary to the contrary by bankers who are busy lobbying against negative rates, see this very nice post by Scott Sumner:
In case that link doesn’t work, I also got Scott’s permission to mirror it on my blog:
Let me know if there is anything else I forgot or if you have any other questions. I’d love to talk to you again sometime.
–Miles