To their credit, in their August 17, 2015 Wall Street Journal article “U.S. Lacks Ammo for Next Economic Crisis” Jon Hilsenrath and Nick Timiraos talk about negative interest rates as a potential policy tool, writing at different points:
- The Fed, for example, could experiment with negative interest rates.
- Mr. Bernanke said he was struck by how central banks in Europe recently pushed short-term interest rates into negative territory, essentially charging banks for depositing cash rather than lending it to businesses and households. The Swiss National Bank, for example, charges commercial banks 0.75% interest for money they park, an incentive to lend it elsewhere. Economic theory suggests negative rates prompt businesses and households to hoard cash—essentially, stuff it in a mattress. “It does look like rates can go more negative than conventional wisdom has held,” Mr. Bernanke said.
Yet although they reflect the evolution of the zero lower bound (still a handy name) into what many central banks are now calling the “effective lower bound,” which is somewhat below zero, Jon and Nick do nothing to inform their readers that cash hoarding can be avoided by the simple expedient of a time-varying paper currency deposit fee at the cash window of a central bank that creates an exchange rate between paper currency and electronic money, which can then lower the yield on paper currency by allowing it to very slowly depreciate against electronic money. (As a terminological note, I should say that most of the time I will continue to use the phrase “zero lower bound” rather than “effective lower bound,” since I think the big shift is to break through the zero lower bound on the nominal interest rate for paper currency–which then removes any effective lower bound on other interest rates as long as the full set of interest rates the central bank then controls are moved in tandem.)
The article also gives a misleading impression with its subtitle, “Policy makers worry fiscal and monetary tools to battle a recession are in short supply” and an unnuanced picture caption saying
U.S. Defenses Down: The Federal Reserve will have fewer monetary weapons in the next recession. It has less room to cut rates, and its swollen portfolio will make it harder to launch new rounds of bond buying.
If the Fed has fewer monetary weapons in the next recession, it will be only because either legal barriers or timidity leave it fewer monetary weapons. The Fed knows how to break through the “effective lower bound” ever since my seminar there on November 1, 2013. (I also gave a seminar at the New York on October 15, 2014 and I am slated to give a seminar at the Chicago Fed at the beginning of September 2015.)
Of course, Jon and Nick are not the only ones off target. I am sure that they are correct in reporting
Others, including Sen. Bob Corker (R.,Tenn.), see only the Fed’s limits. “They have, like, zero juice left,” he said.
Many economists believe relief from the next downturn will have to come from fiscal policy makers not the Fed, a daunting prospect given the philosophical divide between the two parties.
But I am confident that many more economists (as well as senators) would realize how much more the Fed and other central banks can do if the Wall Street Journal would report on the work being done on ways to break through the “effective lower bound.” To that end, I sent an email to Jon (whom I have corresponded with on occasion in the past) that I am copying out here as an open letter, after very light editing:
I wanted to write because I think the title of today’s column is simply false–and the real story is much more interesting. I said much the same thing about a recent Economist column in Quartz:
You have probably been following my work on negative interest rates to some extent. I have the things I have written on that collected here,
and my academic paper with Ruchir Agarwal on it is coming soon.
Central banks are well aware of the fact that it is not that hard to break through the zero lower bound, if only because of my extensive travels to tell them about it, listed in my post
Thinking about this sort of thing is what is happening under the surface at many central banks.