Friday, March 6, 2015

The Limit to Negative Interest Rates

The limit to negative interest rates is not difficult to understand. Paul Krugman gets it right:
When central banks push interest rates on government debt below zero, the effective lower bound is the return on cash held by people who would otherwise be holding that government debt — not people looking to expand their checking accounts. So the liquidity advantages of bank deposits over cash in a vault are pretty much irrelevant. It’s all about the cost of storage.
And really, how high can that cost be? Cecchetti and Schoenholtzargue that given a little time banks or other financial institutions ought to be able to store currency for clients at very low cost — as they say, turning back into the goldsmiths from which banks as we know them evolved — and might even be able to provide some checking-like services on the side.
So it’s not quite a ZLB; but analytically and in terms of policy, a minus x lower bound, where x almost surely less than 1, isn’t all that different.


  1. Tried to use currency for any major transaction lately? Nobody wants to touch it. PayPal -- or, more likely, JP Morgan Chase, needs to figure out how to store currency and transfer titles to it.

  2. Fed: QE Math for Dummies

    The front page of today's WSJ quoted economists who are puzzled why years low rates have resulted in such low productivity growth.
    The Genius of the New Math

    You may ask when we will raise rates? With real productivity low, why would we raise rates? That’s our story, anyway. Besides, European sovereign debt now trades at negative yields, so in comparison, zero is a windfall for investors! We don’t need to take a step forward when everyone else is willing to take a step back. The new math is safe for the time being.

    Bankers and financiers will continue to siphon cash from the productive economy; they will be able to buy more goods and services than savers, taxpayers and voters who could not be bothered to do the math.