LONDON — Kenneth Rogoff, a professor at Harvard University and one of the world’s most prominent economists, said central banks across the globe must start preparing themselves to introduce negative interest rates during the next global recession.
Negative rates are already in place in several major economies around the world, with the European Central Bank, the Bank of Japan, but other banks around the world would be wise to make preparations as well, Rogoff wrote in a new paper for the Journal of Economic Perspectives.
“It makes sense not to wait until the next financial crisis to develop plans and, in any event, it is time for economists to stop pretending that implementing effective negative rates is as difficult today as it seemed in Keynes’ time,” he said, citing the growth of cashless transactions as a reason to think that negative rates could be implemented more easily in future.
“The growth of electronic payment systems and the increasing marginalisation of cash in legal transactions creates a much smoother path to negative rate policy today than even two decades ago.”
Until a couple of years ago, negative rates were largely seen as an academic experiment, likely to be seen in textbooks and economic research papers, but never actually in the real world. However, in the years since the global financial crisis the idea gained prominence, and several central banks decided to take the plunge after 2014 in an attempt to boost weak economic growth by creating inflation.
The basic idea is that by effectively charging banks to store their money with a central bank, banks will be spurred to lend to households, encouraging spending and helping growth. There are always, however, worries that if negative rates spread to households people will literally stuff cash under their mattresses instead of storing it with banks, drying up the pool of cash available for banks to lend.
However, with other “alternative monetary policy instruments” like quantitative easing proving ineffective since the crisis, it may be time to look to negative rates in places like the UK and USA should another recession take hold.
“Alternative monetary policy instruments such as forward guidance and quantitative easing offer some theoretical promise for addressing the zero bound,” he said in “Dealing with Monetary Paralysis at the Zero Bound.”
“But these policies have now been deployed for some years — in the case of Japan, for more than two decades — and at least so far, they have not convincingly shown an ability to decisively overcome the problems posed by the zero bound.”
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