How low can we go? The limits of monetary policy

Abstract

Central banks have recently pushed interest rates below zero. This was done after some considerable time with interest rates being near zero and unemployment remaining very high in many countries. The hope was that negative rates would reinvigorate monetary policy and rescue countries suffering from high unemployment and slow growth. This paper argues that negative rates are not an effective solution to the problems of high unemployment and economic stagnation, and that this policy proposal fails to understand both the nature of negative interest rates and how far interest rates might be pushed below zero percent. Rates a little bit below zero are possible because of insurance and carrying costs. Anything substantially below this would result in considerable economic harm that would exceed any economic benefits from the lower rates. This being the case, fiscal policy must be the policy of choice in difficult economic times.