Abstract
As long as all interest rates move in tandem – including the rate of return on paper currency – economic theory suggests no important difference between interest rate changes in the positive region and interest rate changes in the negative region. Indeed, in standard models, only the real interest rate and spreads between real interest rates matter. Thus, in most respects, negative interest rate policy is conventional. It is only (a) what needs to be done with paper currency, (b) difficulties in understanding negative rates or (c) institutional features interacting with negative rates that make negative interest rate policy unconventional.
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Copyright © 2015 National Institute of Economic and Social Research
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Footnotes
Along with coauthors, I have several academic papers on negative interest rate policy in the works. In particular, this paper builds on Agarwal and Kimball (2015).
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