21 May 2009

FT explores the outer limits of monetary nutjobbery

Negative interest rates, spend it or lose it. Why people wouldn't buy gold and bury it in the back yard or why the negative nominal rates won't result in hyperinflation and a flight to real goods (Flucht in die Sachwerte) is unexplored. Indeed the whole notion of savings representing idle resources that can be put to the task of capital formation is hereby turned totally on its head.

All I can say is those whom the gods would destroy they first make mad!

The Financial Times blog presents this as a serious proposal.

Removing the zero lower bound on nominal interest rates would represent a valuable addition to the policy arsenal of the central banks. We know something about how interest rates work. There is no reason to believe there would be any dramatic change in the effectiveness of policy rate cuts if these cuts bring the official policy rate to a level below zero. We know next to nothing about the effectiveness of the alternative policies that central banks are forced to adopt if they don’t just want to sit on their hand once the official policy rate hits the zero lower bound: quantitative easing and credit easing, relaxing the collateral requirements for central bank lending etc.

All these alternative measures also blur the distinction between the responsibilities of the monetary and the fiscal authorities. It undermines central bank independence, something which, up to a point, I consider valuable.

There are at least three ways to remove the zero lower bound that are feasible: abolish currency, tax currency and ensure that currency is not the numéraire. Taxing currency may be awkward and intrusive, but abolishing currency is not just easy (just do it) but also has considerable advantages as a blow against criminality and terrorism. Unbundling currency and numéraire is something that can be done over the weekend.

I really don’t understand why central banks are not aggressively pursuing options for removing the zero lower bound. It is that they love the seigniorage so much? But they retain seigniorage revenue from currency issuance in the rallod economy. Is it hidebound conservatism and lack of imagination? Quite possibly. But if so, this is a costly mistake. Central banks should act to remove the zero lower bound on nominal interest rates now.


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