Enabling Deep Negative Rates to Fight Recessions: A Guide

90 Pages Posted: 2 Jun 2019

See all articles by Ruchir Agarwal

Ruchir Agarwal

International Monetary Fund (IMF)

Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics; University of Colorado Boulder; Center for Economic and Social Research, USC; National Bureau of Economic Research (NBER)

Date Written: April 2019

Abstract

The experience of the Great Recession and its aftermath revealed that a lower bound on interestrates can be a serious obstacle for fighting recessions. However, the zero lower bound is not a law of nature;it is a policy choice. The central message of this paper is that with readily available tools a central bank canenable deep negative rates whenever needed-thus maintaining the power of monetary policy in the futureto end recessions within a short time. This paper demonstrates that a subset of these tools can have a bigeffect in enabling deep negative rates with administratively small actions on the part of the central bank. Tothat end, we (i) survey approaches to enable deep negative rates discussed in the literature and present newapproaches; (ii) establish how a subset of these approaches allows enabling negative rates while remainingat a minimum distance from the current paper currency policy and minimizing the political costs; (iii) discusswhy standard transmission mechanisms from interest rates to aggregate demand are likely to remainunchanged in deep negative rate territory; and (iv) present communication tools that central banks can useboth now and in the event to facilitate broader political acceptance of negative interest rate policy at theonset of the next serious recession.

Keywords: Central bank independence, Reserve requirements, Interest rate policy, Central banks, Negative interest rates, electronic money, monetary policy, negative rate, paper currency, negative interest rate, rental fee, cash withdrawal

JEL Classification: E40, E5, E01, G21, E52, O24, F16

Suggested Citation

Agarwal, Ruchir and Kimball, Miles S., Enabling Deep Negative Rates to Fight Recessions: A Guide (April 2019). IMF Working Paper No. 19/84. Available at SSRN: https://ssrn.com/abstract=3397542

Ruchir Agarwal

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Miles S. Kimball (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2375 (Phone)
734-764-2769 (Fax)

University of Colorado Boulder ( email )

Campus Box 256
Boulder, CO 80309
United States
303.492.8295 (Phone)
303.492.8960 (Fax)

HOME PAGE: http://www.colorado.edu/Economics/people/faculty/kimball.html

Center for Economic and Social Research, USC ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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