1. Desperate measure or a legitimate strategy in today’s economic climate?
A Presentation By Elijah Fiore

2. Negative Interest Rate Policy (NIRP)

3.  The central bank of Japan cut its deposit rate for
commercial bank reserves from 0.1% to -0.1% in
January 2016.
 In 2014, the European Central Bank adopted
negative rates on bank deposits to avoid a
deflationary spiral.
 Other countries to adopt this policy include:
Sweden, Denmark, and Switzerland.
 Is NIRP a valid option for the US?
 JanetYellen has expressed some openness to the idea
Johnston, M. (2016, February 11). How Negative Interest RatesWork | Investopedia. Retrieved March 10, 2016, from
http://www.investopedia.com/articles/investing/070915/how-negative-interest-rates-work.asp

4. How do federal interest rates work in the US?

5.  As we have learned the Fed has a “toolbox” of
methods in order to influence monetary
policy.
 Changing monetary base (B) to control supply (M)
- buying/selling bonds (open market operations)
 Changing discount rates to affect B
 Changing reserve requirements to influence M
 Changing the reserve-deposit ratio by using
interest rates on the bank deposits in the Fed

6.  A culmination of the Fed’s “tools” is the
concept of interest rate targeting
 Liquidity Preference (short-run)
 Loanable Funds (long-run)
 Federal Open Market Committee
 Federal Funds Rate
▪ Interest on Reserves (IOR)

7.  The Fed usually prefers the framework of the
Liquidity PreferenceTheory to enact its
policies.
Graphs Courtesy of Lecture 3

8. EXPANSIONARY
 Aims at encouraging
economic growth by
increasing money supply.
 Decreasing interest rates
 Decreasing reserve
requirements
 Historically adopted in
times of recession.
 The Fed’s current policy
CONTRACTIONARY
 Aims at reducing money
supply and, eventually,
spending in the country.
 Increasing interest rates
 Increasing reserve
requirements
 Usually enacted during
times of high inflation.

9. What policies has the Federal Reserve adopted in recent years?

10.  After the economic collapse in 2008-09, the
Fed resorted to expansionary policy.
 The FOMC set the federal funds rate to a record
low of 0% - 0.25%.
 Made it less lucrative for banks to deposit money
with the Fed and made it more profitable to
borrow.
 Was this enough to fix the economy?

11. Effective Federal Funds Rate from 1995 to 2015 in Percent
Federal Reserve Economic Data - FRED - St. Louis Fed. (n.d.). Retrieved March 10, 2016, from
https://research.stlouisfed.org/fred2/

12. U.S. Economic Snapshot - February Employment and Revised Q4 GDP Show a Healthy U.S. Economy. (2016,
March 4). Retrieved March 10, 2016, from http://econsnapshot.com/

13. U.S. Economic Snapshot - February Employment and Revised Q4 GDP Show a Healthy U.S. Economy. (2016,
March 4). Retrieved March 10, 2016, from http://econsnapshot.com/

14.  While it is suggested there is some recovery
occurring recently after the “Great
Recession”, it is evident it is much slower
than previous times.
 Current monetary policy is restricted by the
theoretical “ceiling” of 0% interest (zero
lower bound).
 Faster and more meaningful growth through
NIRP?

15. An introduction to NIRP and its merits/faults

16.  Real interest rates have been negative before
 Real interest rate = nominal rate – inflation rate
 Negative nominal rates (which is what NIRP focuses on) has no
precedent in US policy and is relatively new in the grand scheme of
economics.
World DataBank - United Kingdom. (n.d.). Retrieved March 10, 2016, from http://databank.worldbank.org/data/

17.  Negative federal funds rates (and
consequentially the IOR) influence banks to
not hold money in reserves, instead
encourages them to make profits elsewhere.
 Commercial banks lend more money out to
make money
 Theoretically/optimistically, banks would
cover costs caused by the negative rates on
the commercial end.

18.  Lower rates mean more demand for loans
 This results in a higher money supply (and if
banks do not enact negative rates on the
consumer end, unchanged deposit rates)
Johnston, M. (2016, February 11). How Negative Interest RatesWork | Investopedia. Retrieved March 10, 2016, from
http://www.investopedia.com/articles/investing/070915/how-negative-interest-rates-work.asp

19.  Betting on foreign currencies
 Leveraging potential losses from loaning at a
negative rate with the possible growth of a
currency against your own
 The Swiss case
 Possibility of positive real return
 Deflationary economics
 Reallocation from negative to less negative
Mirzayev, E. (2015,April 02). Understanding Negative Rates Of Europe's Central Banks | Investopedia. Retrieved March 10, 2016,
from http://www.investopedia.com/articles/investing/

20.  Avoid the LiquidityTrap
 Higher money supply
 More investment
 Greater personal consumption
 Forces banks to make profits through
“stimulus”

21.  Betting on foreign currencies
 A likely “CurrencyWar” of devaluation in order to
see higher returns
 Interbank/international lending
 Lending to other banks or countries may be
preferable to holding reserves.

22.  NIRP alone cannot force commercial
institutions to do anything, can only
influence.
 Banks may not cover the costs associated with
NIRP
 If consumers are charged negative rates at the
commercial level, how does this affect money
supply and consumption?
 Reduction of interbank lending possible (fed
fund rate)

23.  NIRP is seen as a desperate measure
 The lack of confidence instilled in consumers by
such a policy may outweigh any projected
benefits
 Deflationary spiral
 It encourages risk taking
Randow, J., & Kennedy, S. (2016, March 10). Negative Interest Rates - LessThan Zero [Editorial]. Bloomberg Quicktake.
Retrieved March 10, 2016, from http://www.bloombergview.com/quicktake/negative-interest-rates

24. Are modern economists for or against negative interest rates?

25.  Despite apparent volatility of financial markets
recently, there is little evidence to suggest lack
of liquidity in the US.
 Potential hit to credibility
 Does the fed risk making a knee-jerk decision to
adopt NIRP after recently raising rates (up to 0.38% in
February 2016)?
 Operational level downsides
 We know very little of how to enact NIRP, despite
theoretical soundness of the concept.
 Is the US too large of a financial power or too complex
to implement NIRP?
Sims, E. (2016, February 10).The Danger of Negative Interest Rates [Editorial].CNBC. Retrieved March 10, 2016, from
http://www.cnbc.com/2016/02/10/the-danger-of-negative-interest-rates-commentary.html

26.  Diggle addresses the issues with NIRP and
touches on the “brighter side”
 “Tiered” system to alleviate negative effects (BOJ –
10% of reserves)
 The stimulation of the economy is a net gain for the
banking sector.
 NIRP has not “crippled” Sweden, Switzerland, or
Denmark.
 Negative rates should decrease cost of loans
(supports loan demand)/decrease cost of capital
(supports investment)
 Monetary policy still has much to work with
Diggle, P. (2016, March 10). Negative Interest Rates' Positive Side [Editorial].CNBC. Retrieved March 10, 2016, from
http://www.cnbc.com/2016/03/10/negative-interest-rates-positive-side-commentary.html

27. A glimpse into the brave new world of bleeding-edge monetary policy

28.  ECB set deposit rate at -0.2% in September
2014.
 As of March 2015, one quarter of the “Eurozone”
had negative yields on gov’t-issued debt.
 Countering deflation
 Lowering value of the euro
 Low/negative yields drive away foreign investment in
European debt lowering demand for euro/capital
supply
 Weaker euro drives up demand for European goods.
Mirzayev, E. (2015,April 02). Understanding Negative Rates Of Europe's Central Banks | Investopedia. Retrieved March 10, 2016,
from http://www.investopedia.com/articles/investing/

29. Eurozone GDP AnnualGrowth Rate In Percent

30. Eurozone Overall Inflation Rate In Percent

31. European Central Bank - Statistics. (n.d.). Retrieved March 10, 2016, from https://www.ecb.europa.eu/stats/html/index.en.html
Eurozone Household Loan Consumption AnnualGrowth Rate In Percent

32.  Both GDP and household consumption of
loans’ growth rates increased after the
adoption of NIRP.
 Both indicate some sort of success from NIRP
 Overall inflation rate decreased (disinflation)
to the point of deflation.
 Did NIRP fail?

33.  “Negative interest rates, and monetary policy
more generally, are not a panacea…Fiscal
imbalances, demographic trends, slowing
productivity growth, and the inevitable
disruptions from structural change and
globalization are all more pressing needs…” –
Eric Sims
Sims, E. (2016, February 10).The Danger of Negative Interest Rates [Editorial].CNBC. Retrieved March 10, 2016, from
http://www.cnbc.com/2016/02/10/the-danger-of-negative-interest-rates-commentary.html

34.  As touched on in Diggle’s writing, a “tiered”
execution of NIRP would be most effective.
 The Bank of Japan: negative rates only apply to
10% of reserves
 Switzerland and Denmark: thresholds for reserve
amounts (20X) with reductions in threshold based
on withdraws
 If the US were to enact NIRP, it could
conceivably be in this form to ease issues in
the banking sector.
L., B. (2016, February 3). How to make negative rates less painful [Editorial].The Economist. Retrieved March 10, 2016, from
http://www.economist.com/blogs/freeexchange/2016/02/dont-shed-tier

35.  In my opinion, the economic uncertainties
associated with negative interest rates paired
with the complexity and size of the US
economy suggests that NIRP is not an
appropriate policy decision for the Federal
Reserve to take at this time.

36. Diggle, P. (2016, March 10). Negative Interest Rates' Positive Side [Editorial]. CNBC. Retrieved March 10, 2016, from
http://www.cnbc.com/2016/03/10/negative-interest-rates-positive-side-commentary.html
European Central Bank - Statistics. (n.d.). Retrieved March 10, 2016, from https://www.ecb.europa.eu/stats/html/index.en.html
Federal Reserve Economic Data - FRED - St. Louis Fed. (n.d.). Retrieved March 10, 2016, from https://research.stlouisfed.org/fred2/
Johnston, M. (2016, February 11). How Negative Interest Rates Work | Investopedia. Retrieved March 10, 2016, from
http://www.investopedia.com/articles/investing/070915/how-negative-interest-rates-work.asp
L., B. (2016, February 3). How to make negative rates less painful [Editorial]. The Economist. Retrieved March 10, 2016, from
http://www.economist.com/blogs/freeexchange/2016/02/dont-shed-tier
Mirzayev, E. (2015, April 02). Understanding Negative Rates Of Europe's Central Banks | Investopedia. Retrieved March 10, 2016, from
http://www.investopedia.com/articles/investing/
Randow, J., & Kennedy, S. (2016, March 10). Negative Interest Rates - Less Than Zero [Editorial]. Bloomberg Quicktake. Retrieved March 10,
2016, from http://www.bloombergview.com/quicktake/negative-interest-rates
Sims, E. (2016, February 10). The Danger of Negative Interest Rates [Editorial]. CNBC. Retrieved March 10, 2016, from
http://www.cnbc.com/2016/02/10/the-danger-of-negative-interest-rates-commentary.html
U.S. Economic Snapshot - February Employment and Revised Q4 GDP Show a Healthy U.S. Economy. (2016, March 4). Retrieved March 10,
2016, from http://econsnapshot.com/
Walker, A. (2016, February 15). Why use negative interest rates? - BBC News. Retrieved March 10, 2016, from
http://www.bbc.com/news/business-32284393
World DataBank - United Kingdom. (n.d.). Retrieved March 10, 2016, from http://databank.worldbank.org/data/