Those Hostile to Negative Rates Are ‘Ignorant,’ Rogoff Says

  • Says negative rates are ‘long-run’ policy to be successful
  • Says successful implementation needs ‘whole government’

The critics of negative interest rates are “ignorant” in their analysis of the unprecedented measures forced on central banks across the world over the past years, according to U.S. economist Kenneth Rogoff.

It’s impossible to analyze the effects of the “early experiment” with negative rates because central banks were left to themselves amid a global fiscal retrenchment, Rogoff, a professor at Harvard University, said Wednesday in an interview after speaking at the Skagen Funds annual conference in Oslo.

“I find a lot of what is written by representatives of the financial sector, they’re very hostile to negative rates, to be kind of ignorant,” he said ahead of a tour of Scandinavia, where sub-zero rates first saw the light of day. “They’re talking about their short-term profits, and their short-term interest, but it’s a long-run policy if you do the homework, if you lay the groundwork, it would certainly work very well.”

Policy makers from Stockholm to Zurich and Tokyo have come under fire for cutting rates below zero as they grappled with near non-existent inflation and anemic growth in the wake of the global financial crisis. Critics at mainly commercial banks have argued they are endangering financial stability by stoking consumer borrowing, reducing the ability of lenders to make money and putting future pensions at risk.

Those questioning the efficacy of the policy got more rhetorical ammunition this week when a report showed inflation in Denmark, where rates have been negative for almost half a decade, was the lowest in 63 years in 2016.

According to Rogoff, it’s impossible to draw any conclusions because the efforts to restore growth and inflation have been one-sided. But done “correctly” it can restore “complete control over inflation expectations,” he said.

“To do it correctly, you have to make legal, tax, institutional changes,” he said. “And second, you need to be able to do whatever it takes.” Unlike current efforts, a successful implementation of negative rate policies would “involve the whole government.”

“Central banks can’t by themselves make the legal changes, tax changes, market changes,” he said. “Even for paper currencies, in some countries like the U.S., they can’t do it by themselves. Basically they tip-toed into negative rates.”

Another drawback for analyzing the current policy is that it came after a very long period of easing when policy had “lost its force already,” he said.  

“The people who say we’ve learned a lot about negative rates from these experiments are wrong,” he said. “We learned nothing from them.”

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