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Press, Journal Article


The thing is, when operating below the zero lower bound, monetary

policy is laid bare: it “works” by eroding your purchasing power in a

more direct way than ever before. In the end, we doubt NIRP will

help boost the economy.



Here’s a challenge for you: go down to the nearest town square, pub,

or Starbucks and offer $10 bills in exchange for just a $1 bill. Try it;

we dare you.

At first, each passerby might think you’re crazy or a purveyor of coun-

terfeit bills. But, soon, they may take you up on the lucrative offer, as

$1 gets them $10—a guaranteed return for little risk/effort.

Then, on a subsequent day, try the opposite: ask for $10 in return for

$1. The only taker would have to be as crazy as you.


wants to give up


today for


in the future.

The same intuition governs interest rates everywhere in the known

universe. Since nobody is going to lend money at a negative rate when

they can hold money at zero interest (in the form dollar bills, for ex-

ample), interest rates could never go below zero.

Don’t trust us? Take it from the pen of the godfather of modern eco-

nomics, John Hicks, writing in 1937,“If the cost of holding money can

be neglected, it will always be profitable to hold money rather than

lend it out, if the rate of interest is not greater than zero. Consequently

the rate of interest must always be positive.”



Well, as it turns out, how low interest rates can go depends on the

key assumption from our friend Hicks that depositors, will in fact,

pull money out of the bank in the form of notes and coins that pay a

zero nominal rate rather than save in investments that yield less than

zero or lend money at a negative rate. But this assumption fails for

two reasons.

First, as recently observed by the Bank for International Settlements,

the actual implementation of NIRP equates to a tax or fee on a certain

type of central bank deposit. At the BoJ, for example, a three-tiered

system has been used, with only one rate a (barely) negative one, and

it applies to just 1-2% of bank reserves (See

Figure 1 on previous page


In Europe, the SNB originally instituted an exchange rate floor to

stem the cross-border capital tide from euros to Swiss francs in 2011.

In 2015, when the ECB renewed its easing program, the SNB aban-

doned the currency peg and opted for a new strategy to fend off un-

wanted currency flows: a negative deposit rate instead.

But the SNB’s move wasn’t all that new. In 1973 the SNB also insti-

tuted a “deposit fee” of 2% per quarter on deposits by non-residents

to stem the flow of capital into Switzerland that put upward pressure

on the exchange rate. The Swiss later upped the fee to 3% per quar-

ter in 1978. More broadly, for centuries central banks have raised or

lowered discount rates to encourage or discourage capital inflows and


And that provides a good way of thinking about how negative rates

have been implemented thus far: as a tax or a fee on certain types of

deposits, namely those held at central banks. In short, the negative

rates are charged to deposits that one must hold—they couldn’t get

around it even if they tried by selling them to someone else.

You might wonder though about negative yields on government bonds

in Europe and Japan. Once again, these assets are “safe assets”—assets

that must be used for capital requirements, liquidity, regulatory and

collaterals purposes. As a study of US Treasury bonds reminded us,

investors holding such bonds do so not for the juicy yields, but “be-

cause safe asset investors have nowhere else to go but invest in US

government bonds.”


This was true when rates were at just above zero

and it remains true below the zero bound. There are no alternatives.



The Textbooks Got It Wrong

We surveyed the top-selling macroeconomic textbooks.

In fact, the top-sellers are woefully out-of-date.The most

widely read introductory economics textbook in college,

Greg Mankiw’s

Principles of Economics

, discusses the

zero-lower bound of nominal interest rates.The textbook

declares that “nominal interest rates cannot fall below

zero: Rather than making a loan at a negative nominal

interest rate, a person would just hold cash.” Another

popular text by Paul Krugman and Robin Wells, entitled


states that an interest rate below zero

“isn’t possible” and “nobody would ever buy a bond

yielding an interest rate less than zero because holding

cash would be a better alternative.” Hopefully the new

editions of these textbooks will fix these glaring errors.

Until then, use those college economics books you keep

as doorstops.