ABSTRACT
This chapter analyzes negative interest rate policy (NIRP)—perhaps the most striking and controversial of all the unconventional monetary policies introduced in response to the Great Recession. And it might be even more widely implemented when the next crisis hits, so understanding it should be high on the research agenda. This chapter adds its two cents by strengthening the arguments against the ultralow but positive interest rates. Much as ultralow but positive interest rates spur risk-taking, negative interest rates spur it even more. Much as ultralow but positive interest rates reduce the debt-service burden, negative interest rates reduce it even more, delaying the exit of zombie firms and the efficient reallocation of resources. Much as targeting neutral interest rates, which requires low policy rates and lowers market interest rates below the natural level, may lead to macroeconomic imbalances, negative policy rates may lead to even-larger macroeconomic imbalances. I also analyze the rationale behind NIRP, showing that it is based on a misunderstanding of the interest rate as a purely monetary phenomenon, on an erroneous view of the nature of money, and on the mistaken premise of the zero-bound problem, resulting from focusing on the interest rate channel as the main monetary transmission channel. The chapter is thus a voice against proposals to reduce further the effective lower bound and the level of policy interest rates below zero.
