It's Worse than "Reverse" The Full Case Against Ultra Low and Negative Interest Rates

William White
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William White: Economic Development and Review Committee, OECD

No inetwp151, Working Papers Series from Institute for New Economic Thinking

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.

Keywords: negative interest rates; yield curve control; financial stability; banking supervision; shadow banking. (search for similar items in EconPapers)
JEL-codes: E40 E43 E44 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2021-03-05
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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https://www.ineteconomics.org/uploads/papers/WP_150-Cai-Baker.pdf First version, 2021 (text/html)

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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp151

DOI: 10.36687/inetwp151

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