The Wall Street Journal Gets It Right On Negative Interest Rate Policy, Thanks to Tommy Stubbington

The Wall Street Journal has been slow to understand the potential of negative interest rate policy that I have laid out in various ways. But now, thanks to Tommy Stubbington–who interviewed me at length last Thursday–the Wall Street Journal has done an excellent front page treatment of negative interest rate policy. The whole article is great for giving the current context of negative interest rates in Europe, but below are the passages that most closely reflect Tommy’s interview of me. The first bit below has the same message as the title of my recently published paper “Negative Interest Rate Policy as Conventional Monetary Policy.” The rest should also be familiar to those who follow

Europe’s economic stagnation has proved so long and intractable that the region’s central banks are cutting interest rates to spur their economies. If it helps to move rates from 1% to 0.5% and 0.5% to 0%, why not try minus 0.5%? …

There is no hard limit on how low they can go. If commercial banks start widely imposing negative rates on retail customers, physical cash might look attractive. After all, it has a rate of 0%, although it isn’t without cost. One needs vaults and guards to store it, and it is no good for buying merchandise online.

Still, some economists said negative rates can be a powerful stimulative tool, if central banks can fully harness them.

Miles Kimball, an economist at the University of Michigan, has been preaching the gospel of deeply negative rates to central banks. When demand for money is low, as it is during a deep recession, Mr. Kimball argues, central banks should make borrowing as easy as necessary, even if that means paying banks to do it.

Mr. Kimball has a novel way around the physical-cash problem: make bank notes less valuable. He proposes that the Federal Reserve set an exchange rate between bills and electronic money. If it wanted, say, a minus 1% rate, it could decree that a $100 bill deposited in a year’s time would yield a $99 credit to a bank account. …

The interest in such schemes isn’t purely academic. With rates still at zero in much of the developed world years into the postcrisis recovery, central bankers may find themselves facing the next recession without much room to cut.

“It’s wrong to say central banks have run out of ammunition,” said Mr. Kimball. “Negative rates can be on tap before the next recession. There’s no limit to how deep we can go.”