The Interest Rate Unbound?

In these remarks, prepared for a conference held at Brookings on June 6, 2016 (“Negative Interest Rates: Lessons Learned...So Far”), Jean-Pierre Danthine asks whether the advent of negative central-bank policy rates in Switzerland, Denmark, the euro-zone, and Japan means that there is no longer a “zero lower bound.” He concludes that rates can go about “one inch” lower than economists previously thought; Switzerland and Denmark are at minus 0.75 percent. But it’s unlikely that rates can go much lower than that without provoking a surge in hoarding of paper currency.

The only way to avoid that undesirable outcome would be either to abolish paper currency altogether or to impose a penalty on people who choose to hold paper currency instead of electronic cash. Neither of those approaches is likely to be adopted in a democracy, especially if ordinary savers confront negative rates—that is, if banks charge fees rather than pay interest to put money in an account.

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