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Press, Journal Article
43
I
nvestors feel like Alice when she tumbled down the rabbit hole
into Wonderland. Except instead of encountering talking rab-
bits, incorporeal cats, and time that can run backwards, investors find
themselves in a land where they must pay a bank for the right to hold
a deposit and the bank pays them to take out a loan.
At least that’s how it seems in our world where five global central
banks have imposed
negative
interest rate policy (NIRP) (see
Figure
1
below). The NIRP brigade includes the European Central Bank
(ECB), the Swiss National Bank (SNB), Sweden’s Riksbank, Den-
mark’s NationalBank, and, most recently, the Bank of Japan (BoJ).
Unlike Alice, you may not soon wake from this bad dream. It’s reality.
Worse, we were told by our professors that negative inter-
est rates were impossible, sort of like how it’s impossible to ex-
ceed the speed of light in space travel (see
Did You Know
on the next page). Since “zero” appears to no longer bind,
how can we make sense of this new world?
As we will argue, upon closer inspection, the innovative policy is not
all that innovative. The effective lower bound may just be a little lower
than previously assumed due to financial frictions. Central banks,
meantime, are still pursuing the same strategies as before: attempt-
ing to induce spending and investment by lowering interest rates.
1
M onetary P olicy U nmasked:
O ur T ake on
N egative I nterest R ates
WELCOME TO THE NEGATIVE INTEREST RATE POLICY (NIRP) ZONE:
FIVE GLOBAL CENTRAL BANK POLICY RATES ARE NOW BELOW THE ZERO LOWER BOUND (ZLB)
fig. 1
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2009
2010
2011
2012
2013
2014
2015
2016
% Yield
“NIRP” ZONE
ECB: Overnight Deposit Facility
Denmark: One-Week Certificate of Deposit
Sweden: One-week Debt Certificates
Switzerland: Overnight Sight Deposit
Japan: Policy-Rate Balance Rate*
*On Jan. 29, 2016 the Bank of Japan put in place a three tiered structure of rates, with one of their policy rates being negative (-0.10%)
Source: Bank for International Settlements
«INSTEAD OF
ENCOUNTERING TALKING
RABBITS, INCORPOREAL CATS,
AND TIME THAT CAN RUN
BACKWARDS, INVESTORS
FIND THEMSELVES IN A LAND
WHERE THEY MUST PAY A
BANK FOR THE RIGHT TO
HOLD A DEPOSIT AND THE
BANK PAYS THEM TO TAKE
OUT A LOAN»