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

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  • William White

    (Economic Development and Review Committee, OECD)

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.

Suggested Citation

  • William White, 2021. "It's Worse than "Reverse" The Full Case Against Ultra Low and Negative Interest Rates," Working Papers Series inetwp151, Institute for New Economic Thinking.
    • Handle: RePEc:thk:wpaper:inetwp151
    DOI: 10.36687/inetwp151
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    File URL: https://doi.org/10.36687/inetwp151
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    More about this item

    Keywords

    negative interest rates; yield curve control; financial stability; banking supervision; shadow banking.;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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