On the Normality of Negative Interest Rates

Matheus R. Grasselli and Alexander Lipton

Papers from arXiv.org

Abstract: We argue that a negative interest rate policy (NIRP) can be an effect tool for macroeconomic stabilization. We first discuss how implementing negative rates on reserves held at a central bank does not pose any theoretical difficulty, with a reduction in rates operating in exactly the same way when rates are positive or negative, and show that this is compatible with an endogenous money point of view. We then propose a simplified stock-flow consistent macroeconomic model where rates are allowed to become arbitrarily negative and present simulation evidence for their stabilizing effects. In practice, the existence of physical cash imposes a lower bound for interest rates, which in our view is the main reason for the lack of effectiveness of negative interest rates in the countries that adopted them as part of their monetary policy. We conclude by discussing alternative ways to overcome this lower bound , in particular the use of central bank digital currencies.

Date: 2018-08
New Economics Papers: this item is included in nep-cba, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1808.07909

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