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The experience of the Great Recession and its aftermath revealed that a lower bound on interest rates can be a serious obstacle for fighting recessions. However, the zero lower bound is not a law of nature; it is a policy choice. The central message of this paper is that with readily available tools a central bank can enable deep negative rates whenever needed—thus maintaining the power of monetary policy in the future to end recessions within a short time. This paper demonstrates that a subset of these tools can have a big effect in enabling deep negative rates with administratively small actions on the part of the central bank. To that end, we (i) survey approaches to enable deep negative rates discussed in the literature and present new approaches; (ii) establish how a subset of these approaches allows enabling negative rates while remaining at a minimum distance from the current paper currency policy and minimizing the political costs; (iii) discuss why standard transmission mechanisms from interest rates to aggregate demand are likely to remain unchanged in deep negative rate territory; and (iv) present communication tools that central banks can use both now and in the event to facilitate broader political acceptance of negative interest rate policy at the onset of the next serious recession.
The experience of the Great Recession and its aftermath revealed that a lower bound on interest rates can be a serious obstacle for fighting recessions. However, the zero lower bound is not a law of nature; it is a policy choice. The central message of this paper is that with readily available tools a central bank can enable deep negative rates whenever needed—thus maintaining the power of monetary policy in the future to end recessions within a short time. This paper demonstrates that a subset of these tools can have a big effect in enabling deep negative rates with administratively small actions on the part of the central bank. To that end, we (i) survey approaches to enable deep negative rates discussed in the literature and present new approaches; (ii) establish how a subset of these approaches allows enabling negative rates while remaining at a minimum distance from the current paper currency policy and minimizing the political costs; (iii) discuss why standard transmission mechanisms from interest rates to aggregate demand are likely to remain unchanged in deep negative rate territory; and (iv) present communication tools that central banks can use both now and in the event to facilitate broader political acceptance of negative interest rate policy at the onset of the next serious recession.
This global handbook provides an up-to-date and comprehensive overview of shadow banking, or market-based finance as it has been recently coined. Engaging in financial intermediary services outside of normal regulatory parameters, the shadow banking sector was arguably a critical factor in causing the 2007-2009 financial crisis. This volume focuses specifically on shadow banking activities, risk, policy and regulatory issues. It evaluates the nexus between policy design and regulatory output around the world, paying attention to the concept of risk in all its dimensions—the legal, financial, market, economic and monetary perspectives. Particular attention is given to spillover risk, contagion risk and systemic risk and their positioning and relevance in shadow banking activities. Newly introduced and incoming policies are evaluated in detail, as well as how risk is managed, observed and assessed, and how new regulation can potentially create new sources of risk. Volume I concludes with analysis of what will and still needs to happen in the event of another crisis. Proposing innovative suggestions for improvement, including a novel Pigovian tax to tame financial and systemic risks, this handbook is a must-read for professionals and policy-makers within the banking sector, as well as those researching economics and finance.
This book sheds new light on a recently introduced monetary tool – negative interest rates policy (NIRP). It provides in-depth insight into this phenomenon, conducted by the central banks in several economies, for example, the Eurozone, Switzerland and Japan, and its possible impact on systemic risk. Although it has been introduced as a temporary policy instrument, it may remain widely used for a longer period and by a greater range of central banks than initially expected, thus the book explores its effects and implications on the banking sector and financial markets, with a particular focus on potentially adverse consequences. There is a strong accent on the uniqueness of negative policy rates in the context of financial stability concerns. The authors assess whether NIRP has any – or in principle a stronger – impact on systemic risk than conventional monetary policy. The book is targeted at presenting and evaluating the initial experiences of NIRP policy during normal, i.e. pre-COVID, times, rather than in periods in which pre-established macroeconomic relations are rapidly disrupted or, specifically, when the source of the disruption is not purely economic in nature, unlike in systemic crisis. The authors adopt both theoretical and practical approaches to explore the key issues and outline the policy implications for both monetary and macroprudential authorities, with respect to negative interest rate policy, thus the book will provide a useful guide for policymakers, academics, advanced students and researchers of financial economics and international finance.
In recorded financial history, there are almost no occasions, other than the present, where a significant portion of the global bond markets has been trading at negative nominal yields. Is this an anomaly or what will be the normal state of the financial markets in years to come? This monograph investigates the ongoing debate between the pros and cons of negative nominal yields and the economic rationale(s) that are used to justify or criticize underlying policies. Even in academic circles, few agree on the costs and benefits of negative yields. Surveying the global bond markets of the day, I find the impact of negative yields in almost all regions and sectors, though sovereign bond markets, which are closest to monetary policy, are the dominant category of bonds with negative yields. I next look at the participants in the negatively yielding bond market and at the motivations that justify their actions. The conclusion is that although different participants might have different reasons to buy negatively yielding bonds, their collective action is certainly responsible for creating a local equilibrium in which these markets clear. Central bank policy is the next focus in this monograph, and I discuss in depth the economic rationale as propounded by one such bank, the European Central Bank. I conclude with a discussion of the blurring lines between monetary and fiscal policy, which are likely to become centerpieces in future years as global sovereign debt levels rise. Next, I look at the influence of negative yields on other asset markets, such as equities, and especially derivatives markets, such as the demand for options. A discussion of potential risks then follows. The monograph concludes with a review of the impact of negative yields on nonfinancial aspects of society. Although the forecast is anything but crystal clear, the evolution of markets and economics in the years to come will undoubtedly be influenced by this massive economic experiment of negative yields.
This paper focuses on negative interest rate policies and covers a broad range of its effects, with a detailed discussion of findings in the academic literature and of broader country experiences.
This edited volume presents the key unresolved debates in monetary macroeconomics, covering the five topics of budget, trade, taxes, exchange rates and monetary policy. For each topic, there are two authors — one arguing for a certain policy and one against. The book takes an approach eschewing mathematics or econometrics, instead presenting arguments in the spirit of political economy - while incorporating the most recent thinking in macroeconomics. This approach, combined with the objective of encouraging debate, makes the book ideal reading for students of monetary macroeconomics, researchers seeking alternative views, and the general public.
Expanded and updated, Charles Eisenstein's classic treatise on capitalism, currency, and the gift economy. This revised version traces the history of money, from ancient gift economies to modern capitalism, and includes new material on cryptocurrencies and emerging research that has come out since the book's original publication. Charles Eisenstein shows how capitalism contributes to alienation, competition, and scarcity; destroys community; and necessitates endless growth at the cost of social and environmental devastation. Today, these trends have reached their extreme--and their collapse presents a golden opportunity to transition to a more connected, ecological, and sustainable way of being. Eisenstein describes the deeper narratives beneath our economic system, and how we can reimagine it to align with a new story. Applying a broadly integrated synthesis of theory, policy, and practice, he explores avant-garde concepts of the New Economics, including negative-interest currencies, local economies, gift economics, cryptocurrencies, and the restoration of the commons. Tapping into a rich lineage of conventional and unconventional economic thought, Eisenstein presents a vision that is original yet commonsense, radical yet gentle, and increasingly relevant as the crises of our civilization deepen.
This book bridges the gap between undergraduate textbooks using graphs, and graduate level texts that focus on a single theoretical framework. The text presents a range of models and connects them to current policy issues and empirical results. The field of macroeconomics has made great strides, but it is far from a finished product. See the website for more information: https://primeronmacro.blogspot.com/
We study the optimal design of a central bank digital currency (CBDC) in an environment where agents sort into cash, CBDC and bank deposits according to their preferences over anonymity and security; and where network effects make the convenience of payment instruments dependent on the number of their users. CBDC can be designed with attributes similar to cash or deposits, and can be interest-bearing: a CBDC that closely competes with deposits depresses bank credit and output, while a cash-like CBDC may lead to the disappearance of cash. Then, the optimal CBDC design trades off bank intermediation against the social value of maintaining diverse payment instruments. When network effects matter, an interest-bearing CBDC alleviates the central bank's tradeoff.