My latest Macro Musings podcast is with Miles Kimball, professor of economies at the University of Michigan and blogger at "Confessions of a Supply-Side Liberal". Miles is a well-known advocate of breaching the zero lower bound via the adoption of negative interest rates. Moreover, he has shown how to do it without getting rid of physical cash. Miles sat down with me to discuss his ideas on this topic as well as how the macroeconomics profession has changed over the past few decades. I had a great time discussing these issues with Miles. You will enjoy the conversation too.
I would like to make several points on this controversial topic. First, if you believe in allowing markets to clear via the adjustment of prices, then you should in principle be supportive of negative interest rates. For an interest rate is just an intertemporal price--a price that clears resources across time--and sometimes a severe enough demand shock may require nominal rates to go negative for markets to clear. This is a point I have written about myself.
Second, central banks that have lowered interest rates to zero and in some cases below zero are not necessarily "artificially" depressing interest rates. It could be that a central bank is simply following the market-clearing level of interest rates--or the natural interest rate--down to lower levels as the economy weakens. This, in my view, is what most central banks have been doing in recent years. Too many observes miss this point.
Three, to underscore the point that the Fed in particular simply followed the natural interest rate down in recent years, it is important to note that the Fed is not that big of a player in the Treasury market. Some would have you believe it has bought up the entire treasury market in attempt to depress interest rates. In fact, it has about 19% of the outstanding marketable treasuries, roughly the same percent it had prior to the crisis! Most of the increase in U.S. national debt has been readily bought up by others. This speaks to the ongoing safe asset shortage problem.
You can listen to the podcast via iTunes or Sound Cloud, or through the embedded player above. And remember to subscribe since more guest are coming!
Related Links
How and Why to Eliminate the Zero Lower Bound--Miles Kimball
Breaking through the Zero Lower Bound--Miles Kimball
Negative Interest Rates as Conventional Monetary Policy--Miles Kimball
Savers' Real Problem--David Beckworth and Ramesh Ponnuru
The Safe Asset Problem is Back: Negative Interest Rate Edition--David Beckworth
Negative rates should restore balance by reducing asset prices, but they are not allowed by banks to do that ...
ReplyDeleteAs I understand it, negative interest rates on government debt is partly due to regulatory requirements for institutions to hold it. Are there any estimates as to the amplitude of this effect? Also, if this effect is large, couldn't financial regulations be modified to reduce the propensity of institutions to hold government debt? (For example, the Social Security administration could sell its Treasury holdings and buy other investments.)
ReplyDeleteHave you happened to see this St. Louis Fed write-up on negative interest rates as a tax?
ReplyDeletehttps://www.stlouisfed.org/on-the-economy/2016/may/negative-interest-rates-tax-sheep-clothing
"At the end of the day, negative interest rates are taxes in sheep’s clothing. Few economists would ever claim that raising taxes on households will stimulate spending. So why would they think negative interest rates will?"
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