Negative interest rates hit the big time

Reuters

Article Highlights

  • How negative can interest rates be? Could it be negative 2% or 3% or more?

    Tweet This

  • For central bank policy rates, there is a zero bound only if they all think there is a zero bound

    Tweet This

The European Central Bank is discussing whether it should for first time set negative interest rates for banks’ deposits with it, and may well do so at its meeting on June 5. The press is discussing the ECB’s discussions. This is a highly interesting development financially, but also intellectually. (To be clear, this means negative nominal interest rates, not just negative real rates which result from inflation being higher than positive nominal interest rates.)

Economists often used to proclaim that there was a “zero bound” to interest rates—that nominal interest rates could be positive or even zero, but never negative. It wasn’t true, but that didn’t stop them from thinking it. Indeed, for central bank policy rates, there is a zero bound only if they all think there is a zero bound.

Negative interest rates are perfectly possible: they have actually been used by smaller central banks—the Swiss as early as the 1970s, and the Swedish and Danish central banks recently. But the ECB would mark the first use by a big time, principal central bank. The German Bundesbank has already announced it agreement with the possibility.

Since this all makes it even more obvious than before that interest rates can be negative, at least we should not have to hear about the “zero bound” any longer. But an interesting question does remain: how negative can interest rates be? A number like negative ½% is one thing—could it be negative 2% or 3% or more? This question awaits more experience.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alex J.
Pollock

What's new on AEI

Making Ryan's tax plan smarter
image The teacher evaluation confronts the future
image How to reform the US immigration system
image Inversion hysteria
AEI on Facebook
Events Calendar
  • 01
    MON
  • 02
    TUE
  • 03
    WED
  • 04
    THU
  • 05
    FRI
Wednesday, September 03, 2014 | 9:00 a.m. – 10:30 a.m.
From anarchy to Augustus: Lessons on dealing with disorder, from Rome’s first emperor

We invite you to join us for two panel discussions on how Augustus created order from chaos 2,000 years ago, and what makes for durable domestic and international political systems in the 21st century.

Wednesday, September 03, 2014 | 12:00 p.m. – 1:30 p.m.
Multiple choice: Expanding opportunity through innovation in K–12 education

Please join us for a book launch event and panel discussion about how a marketplace of education options can help today's students succeed in tomorrow's economy. Attendees will receive a complimentary copy of the featured book.

Thursday, September 04, 2014 | 12:00 p.m. – 1:30 p.m.
How conservatives can save the safety net

Please join us for a luncheon event in which our panel will discuss what conservatives can learn from how liberals talk and think about the safety net and where free-market economics, federalism, and social responsibility intersect to lift people out of poverty.

No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.