It’s Worse than 'Reverse': The Full Case Against Ultra Low and Negative Interest Rates

26 Pages Posted: 1 Apr 2021

See all articles by William Roy White

William Roy White

Organization for Economic Co-Operation and Development (OECD)

Date Written: March 5, 2021

Abstract

It is becoming increasingly accepted that lowering interest rates might at some point prove contractionary (the “reversal interest rate”) if lower lending margins cut the supply of bank loans. This paper argues that there are many other reasons to question reliance on monetary policy to provide economic stimulus, particularly over successive financial cycles. By encouraging the issue of debt, often for unproductive purposes, monetary stimulus becomes increasingly ineffective over time. Moreover, it threatens financial stability in a variety of ways, it leads to real resource misallocations that lower potential growth, and it finally produces a policy “debt trap” that cannot be escaped without significant economic costs. Debt-deflation and high inflation are both plausible outcomes.

Keywords: negative interest rates, yield curve control, financial stability, banking supervision, shadow banking.

JEL Classification: E40, E43, E44.

Suggested Citation

White, William Roy, It’s Worse than 'Reverse': The Full Case Against Ultra Low and Negative Interest Rates (March 5, 2021). Institute for New Economic Thinking Working Paper Series No. 151
https://doi.org/10.36687/inetwp151 , Available at SSRN: https://ssrn.com/abstract=3812869

William Roy White (Contact Author)

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
61
Abstract Views
192
rank
418,600
PlumX Metrics