Thursday, February 18, 2016

How negative can you go?


The spectre of negative interest rate policy (NIRP) in the Eurozone (at least) was floated at least six years ago. What monetary theorists need to understand is that bank systems weren't (at that time) and in some cases still aren't set up to accommodate such policy ad inifnitum. Not all bank systems are created equal. Even if NIRP for overnight deposits makes loans to businesses and mortgages more attractive (in theory), in practice wholesale funding costs may make it untenable in practice due to a potential liquidity crunch. There are of course a multitude of other factors at work --no amount of monetary massaging will solve the serious distributional issues exacerbating inequality-- but we are loathe to think outside the bounds of what is expressible to the orthodoxy.