It’s Worse than “Reverse” – The Full Case Against Ultra Low and Negative Interest Rates

Link: https://www.ineteconomics.org/research/research-papers/its-worse-than-reverse-the-full-case-against-ultra-low-and-negative-interest-rates

Paper: https://www.ineteconomics.org/uploads/papers/WP_151-White-NegativeInterestRates.pdf

Abstract:

It is becoming increasingly accepted that lowering interest rates might at some point prove contractionary (the “reversal interest rate”) if lower lending margins cut the supply of bank loans. This paper argues that there are many other reasons to question reliance on monetary policy to provide economic stimulus, particularly over successive financial cycles. By encouraging the issue of debt, often for unproductive purposes, monetary stimulus becomes increasingly ineffective over time. Moreover, it threatens financial stability in a variety of ways, it leads to real resource misallocations that lower potential growth, and it finally produces a policy “debt trap” that cannot be escaped without significant economic costs. Debt-deflation and high inflation are both plausible outcomes.

https://doi.org/10.36687/inetwp151

Author(s): William White

Publication Date: 5 March 2021

Publication Site: Institute for New Economic Thinking