The Progress of Negative Interest Rate Policy Understanding


Quite a few months back (about last Fall), I had an interview with a journalist in Zurich that did not result in an article. For that interview I had prepared some thoughts that I wanted to share with you. Keep in mind 

1. Because of my visits to central banks, these proposals are getting wide discussion within central banks, and because of the two London conferences in May 2015, between central banks as well. Under the surface, there is a much bigger consensus than what you would assume.

2. The two countries I would bet on to introduce a negative paper currency interest rate first are the UK–as I predicted early on before even visiting (see “Could the UK Be the First Country to Adopt Electronic Money?” ) and his been borne out by subsequent events, and Switzerland, which currently has rates in the deepest negative territory (see “The Swiss National Bank Means Business with Its Negative Rates”  and “Swiss “Pioneers! The Swiss as the Vanguard for Negative Interest Rates.”

3. The economics of my proposal is clear, and has withstood detailed questioning by central bankers all over the world. But with few exceptions, those who serve on monetary policy committees have sensitive political antennae and are worried about the politics of a negative paper currency interest rate.

4. Because of the political sensitivity of a negative paper currency interest rate, the only central bank officials to have alluded to it publicly are Bank of England Chief Economist Andrew Haldane (who refers directly to my work) and the Swiss National Bank officials involved in cosponsoring the conference on “Removing the Zero Lower Bound on Interest Rates” in London on May 18, 2015. So far, other central banks do not want to discuss my solution publicly, but there are many central bank staff economists around the world who are enthusiastic, believing as I do that from a technical point of view it would work well and solve an important problem. 

Update Since Last Fall: Three former members of the FOMC have now discussed my proposal: Ben Bernanke, Narayana Kocherlakota and Donald Kohn. You can hear all of them talk about it in this video from the Brookings conference on negative interest rates at which I spoke. Ben Bernanke was also asked about my proposal in an interview by Ezra Klein; you can see his answer here. Narayana Kocherlakota also wrote about my proposal here.

5. One important virtue of my approach is its continuity with the current system: in small doses it is almost indistinguishable to ordinary households from the way we do things now.

6. If I were closely consulted on introducing a paper currency interest rate through a crawling-peg exchange rate between paper currency and electronic money, I would advise making it sound very bureaucratic and boring. I would start very subtly, with a dose small enough that there would be no chance of any significant negative side effects.

7. A cut of 50 basis points by the SNB would be well worth doing because it would have a substantial effect on foreign exchange rate for Swiss Francs.

8. Even if you do not want to cut interest rates now, you want to prepared for the next recession.

9. An exchange rate on paper money by the SNB would be a blessing for other countries. They could see in Switzerland that it works. Moreover, it could have an important stabilizing effect on world financial markets because it would help allay the fear that the world economy might be doomed to replicate the performance of the Japanese economy in the last two decades.

See links to everything I have written about negative interest rates in my bibliographic post “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide.”