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Negative interest rates: a Keynesian perspective

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  • Fiona Maclachlan

    (Department of Economics and Finance, Manhattan College, Riverdale, NY, USA)

Abstract

One of the most surprising recent developments in financial markets has been the emergence of negative yields on long-term debt. This development contradicts the notion of the zero lower bound which, until recently, was taken as a given in monetary policy discussions. In this paper, I look at the phenomenon of negative yields through the lens of Keynes's liquidity-preference theory of interest. I review changes to the financial market environment that have led to a shift in the liquidity of government bonds relative to bank deposits, and with this empirical context in place, I argue Keynes's theory is consistent with the phenomenon of negative bond yields. Finally, I consider Keynes's thought in relation to a negative interest-rate policy (NIRP) and argue that while he would be opposed to a NIRP as a temporary expedient, a mildly negative policy rate fits with his long-run vision for a world with a zero risk-free long-term interest rate.

Suggested Citation

  • Fiona Maclachlan, 2019. "Negative interest rates: a Keynesian perspective," Review of Keynesian Economics, Edward Elgar Publishing, vol. 7(2), pages 171-184, April.
    • Handle: RePEc:elg:rokejn:v:7:y:2019:i:2:p171-184
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    More about this item

    Keywords

    Keynes; negative interest rates; NIRP; liquidity preference;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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