Enabling Deep Negative Rates to Fight Recessions: A Guide

IMF Working Papers, April 29, 2019

Source details

The zero lower bound is not a law of nature; it is a policy choice.
With readily available tools a central bank can enable deep negative rates whenever needed—thus maintaining the power of monetary policy in the future to end recessions within a short time.
A subset of these tools can have a big effect in enabling deep negative rates with administratively small actions on the part of the central bank.

The paper surveys approaches to enable deep negative rates discussed in the literature and presents new approaches.
It establishes how a subset of these approaches allows enabling negative rates while remaining at a minimum distance from the current paper currency policy and minimizing the political costs.
It discusses why standard transmission mechanisms from interest rates to aggregate demand are likely to remain unchanged in deep negative rate territory.
It presents communication tools that central banks can use both now and in the event to facilitate broader political acceptance of negative interest rate policy at the onset of the next serious recession.

Central banks can retain monetary policy effectiveness by adopting readily available tools to enable deep negative rates when recessions warrant rapid action.
Implementing a targeted subset of measures can achieve substantial policy space expansion with administratively small interventions.
Minimizing departure from existing paper currency arrangements and emphasizing administrative simplicity can reduce political resistance.
Proactive communication strategies should be developed now so that broader political acceptance of negative interest rate policy is achievable at the onset of the next serious recession.

Banking; Central bank policy rate; Currencies; Digital currencies; Financial services; Monetary policy; Money; Negative interest rates; Technology; Zero lower bound.
Keywords emphasized include: cash window, Central bank policy rate, Digital currencies, electronic money, paper currency storage, Rental fee approach, negative rate, nominal rate, rate of return.

Source: Enabling Deep Negative Rates to Fight Recessions: A Guide, Ruchir Agarwal and Miles Kimball, April 29, 2019 (IMF Working Paper).