This Central Bank Crisis Tool Might Actually Hurt: Eco Pulse

Economists give negative interest rates a scathing review in new research, dealing an intellectual blow to a policy tool that could be one of central bankers’ last resorts in future recessions.

Benchmark interest rates might bump up against zero from 30 percent to 40 percent of the time in the U.S. going forward, and their neutral setting has fallen the world over. That makes questions about the efficacy of negative rates of utmost importance. Unfortunately for monetary policy makers, Brown University’s Gauti Eggertsson and his co-authors call negative-rate policies “at best irrelevant” in the research leading off this week’s economic roundup.

We also take a look at studies on student loan default, prospects for productivity growth and how Federal Reserve rate increases affect corporate borrowing costs. Check this column each Tuesday for short summaries of new findings from around the world.

Are Negative Nominal Interest Rates Expansionary?
Published November 2017
Available on the NBER website

The fallout from the global financial crisis saw the European Central Bank, Swiss National Bank and Bank of Japan push rates below zero, to debatable effect. Eggertsson, a former New York Fed researcher, Ella Getz Wold and Ragnar Juelsrud suggest that such policies might be counterproductive.

When policy rates dip below zero, the usual transmission mechanism for monetary policy – where banks pass on policy rates to consumer-facing interest rates – breaks down, they find in their National Bureau of Economic Research working paper. If that holds in future downturns, it means consumers won’t have added incentive to move money out of savings, as theory would suggest. Nor will they benefit from extra-attractive loan rates designed to spur borrowing. At the same time, the policies could reduce bank profits, so they may even hurt economic growth.