An October 23, 2016 Business Insider article emphasizes just how far negative interest rate policy has come in the last four years since I published “How Subordinating Paper Currency to Electronic Money Can End Recessions and End Inflation” (originally titled “How paper currency is holding the US recovery back”) and started following negative interest rate discussions closely.
One of the big advances in fostering understanding of negative interest rate policy is the publication of Ken Rogoff’s book The Curse of Cash, which has a thorough discussion of the full-bore negative interest rate policy I distinguished from current negative interest rate policy in “If a Central Bank Cuts All of Its Interest Rates, Including the Paper Currency Interest Rate, Negative Interest Rates are a Much Fiercer Animal.” (See my post “Ana Swanson Interviews Ken Rogoff about The Curse of Cash” for more about the book.) Ken has been on the hustings promoting his book, and in the process greatly raising journalists’ and their readers’ understanding of negative interest rate policy. This article has some audio of Ken explaining negative interest rates.
Here is what Dan Bobkoff and Akin Oyedele write about the remarkable progress of negative interest rate practice:
The policy has evolved from radical idea to mainstream policy of postrecession governments in Europe and Asia. And in the US, Federal Reserve Board Chair Janet Yellen has said the US will not rule out using them if it needs to. …
In textbooks like Mishkin’s, a 0% interest rate was known as the “zero lower bound.” It just didn’t seem to make sense to go below that.
Now economists have to rename it. …
Today, countries with negative policy rates make up almost a quarter of global gross domestic product, according to the World Bank.
One element of Dan’s and Akin’s article deserves further discussion. They touch on the difficulty of passing through negative rates to household depositors:
“It’s very hard to obviously get depositors to accept negative interest rates for putting their money in there,” said Marc Bushallow, managing director of fixed income at Manning and Napier, which manages $35 billion in assets.
What’s much more likely is that only big banks will be forced to pay to lend money to one another. That would exempt small depositors from paying, but still have some of the stimulus effects that the central banks intend to have.
Something I emphasize in my talks to central banks is that a central bank is better off letting private banks handle much of the pass-through because the negative in regular people’s deposit and savings accounts that are likely to be a political problem a central bank represent a customer-relations problem for private banks that the private banks are likely to handle relatively carefully.
I think of negative deposit rates for small household checking and savings accounts as a big enough political problem for central banks that I have been strongly recommending to central banks that they use a tiered interest-on- reserves formula that actively subsidizes zero rates for small household checking and savings accounts. If a central bank can announce that it is trying to avoid having regular people with modest balances face negative rates in their checking or savings account, it should dramatically mitigate the political costs to a central bank of a vigorous negative interest rate policy.
I have written about subsidizing zero rates for small household accounts in a number of posts:
- How to Handle Worries about the Effect of Negative Interest Rates on Bank Profits with Two-Tiered Interest-on-Reserves Policies”
- Ben Bernanke: Negative Interest Rates are Better than a Higher Inflation Target”
- The Bank of Japan Renews Its Commitment to Do Whatever it Takes
- Why Central Banks Can Afford to Subsidize the Provision of Zero Rates to Small Household Checking and Savings Accounts
- How Negative Interest Rates Prevail in Market Equilibrium
Courage on the part of central bankers plus smart efforts to mitigate the political costs of a vigorous negative rate policy can do a great deal to advance negative interest rate policy as an element of the monetary policy toolkit. Nations that have such courageous and shrewd central bankers can then return to the Great Moderation, while maintaining low inflation targets.