It’s Worse than 'Reverse': The Full Case Against Ultra Low and Negative Interest Rates
26 Pages Posted: 1 Apr 2021
Date Written: March 5, 2021
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: Suggested Citation
https://doi.org/10.36687/inetwp151 , Available at SSRN: https://ssrn.com/abstract=3812869