Notes on "Negative Interest Rate Policy as Conventional Monetary Policy" (Kimball, Miles S)

Negative Interest Rate Policy as Conventional Monetary Policy

Kimball, Miles S

2015, Vol.234(1), pp.R5-R14 [Peer Reviewed Journal]

This essay is about how best to break with that restrictive tradition and engineer nonzero interest rates on paper currency when needed for economic stabilisation.

Relevant papers: Willem Buiter and Nikolaos Panigirtzoglou (2001,2003), Buiter (2004, 2007, 2009a,b,c), Kimball (2013a,b)

Three parts:

• the details of engineering a nonzero paper currency interest rate and thereby eliminating the lower bound
• central banks have the power to establish the relative prices of different forms of money under their jurisdiction
• the Fed has fixed exchange rates between all of the different forms of money under its jurisdiction
• the starting point: to encourage economic actors to use the electronic currency as the unit of account, and as the unit in which prices are expressed
• governments are big enough acts in the economy and in declaring focal points in multiple equilibrium situations
• have the value of a paper dollar in terms of electronic dollars fall very gradually according to a crawling peg exchange rate
• a great advantage of depreciating the paper dollar relative to the electronic dollar as compared to a policy of keeping paper at par but raising the inflation rate is that to provide leeway relative to the zero low bound, the paper dollar only needs to depreciate gradually
• all of the aspects of monetary policy that would be unchanged by getting paper currency out of the way
• instead of always treating the value of one paper dollar as equal to the value of one electronic dollar
• the politicks of negative interest rate policy
• to explain to people repeatedly, ideally long in advance of when negative interest rates are actually needed
• it is worth saying over and over again that even for savers, deep negative interest rates for a short time during a serious recession, bringing speedy economic recovery, are better than zero nominal rates that are 2 per cent below inflation for years and years, accompanied by a lagging economy for that longer time
• the focus on savers, while deeply entrenched in political thought, should be put into perspective by pointing out the benefits of negative interest rates to borrowers
• paper currency would earn the same as electronic accounts -> no incentive to underuse paper currency
• it may be useful to point out that the central bank can easily subsidise the provision of zero interest rates to small checking and saving accounts by tying such provision to the amount of a bank's reserves that is exempted from negative interest rates
• with the zero lower bound vanquished, the target rate for inflation can be lowered, since inflation in the electronic unit of account is not necessary in order to steer away from the zero lower bound
• the possibility of deep negative interest rates means that aggregate demand is no longer scarce
• the benefits of economic stabilisation should be emphasised