The Case for Implementing Effective Negative Interest Rate Policy

Abstract

This paper explores the case for gradually instituting changes necessary to implement unconstrained negative interest rate policy as a long-term solution to the effective lower bound on policy interest rates. If small depositors can be excluded, then passthrough of negative rates to large and wholesale bank depositors should be straightforward with administrative and pecuniary obstacles to large-scale hoarding. We argue that pure quantitative easing will be an insufficient tool to raise inflation expectations in the next recession using evidence that market participants have updated their beliefs of its potency. We present a systematic categorization of alternative policies and their constraints.

Keywords: monetary policy, zero lower bound, quantitative easing

JEL Classification: E630, E580, E520, E660