«Central banks have typically displayed a great deal of reluctance to employ negative interest rates. The U.S. Federal Reserve, for example, avoided doing so even in the depths of the last recession. This reluctance can make going below zero look like an act of desperation, damaging confidence in the economy. That's arguably why the Bank of Japan's move in January to lower its policy rate slightly into negative territory hasn’t been as effective as expected. The Fed risks falling into the same trap by insisting that negative interest rates are not under consideration, even though the rate it pays on bank reserves remains very close to zero.
Communication is particularly important given the trepidation with which people -- and their elected representatives -- often view negative interest rates. Here, Denmark's experience is instructive. The Danish central bank has found it easier than some others to generate political support -- and even pass legislation -- to employ negative interest rates. The key difference is that Danes understand and fully support the central bank's goal of maintaining a stable exchange rate between the Danish krone and the euro. The Fed and other central banks will face fewer political obstacles in implementing negative interest rates if they do more to ensure that their mandates enjoy similarly broad public support.»
By
Narayana Kocherlakota (president of the Federal Reserve Bank of Minneapolis from 2009 through 2015)
Narayana Kocherlakota (president of the Federal Reserve Bank of Minneapolis from 2009 through 2015)
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