In the FT, Sam Fleming and Demetri Sevastopulo report that the White House considers Marvin Goodfriend for the Federal Reserve’s Board of Governors.
He has criticised the Fed’s crisis-era balance sheet expansion, saying the central bank should generally not purchase mortgage-backed securities, and has advocated the use of monetary policy rules to guide policy, as has Mr Quarles. …
At the same time, however, Mr Goodfriend has been willing to contemplate the use of deeply negative rates to stimulate growth — something that the Fed has thus far not embarked upon. In 1999 he wrote that negative rates were a feasible option, years before central banks started actually experimenting with them.
To implement negative rates while preserving cash, Goodfriend has advocated a flexible exchange rate between deposits and cash. On Alphaville, Matthew Klein quotes from a recent paper of Goodfriend’s:
The zero bound encumbrance on interest rate policy could be eliminated completely and expeditiously by discontinuing the central bank defense of the par deposit price of paper currency. … the central bank would no longer let the outstanding stock of paper currency vary elastically to accommodate the deposit demand for paper currency at par. …
The reason to abandon the pegged par deposit price of paper currency is analogous to the … reasons for abandoning the gold standard and fixed exchange rate: it is to let fluctuations in the deposit demand for paper currency be reflected in the deposit price of paper currency so as not to destabilize the general price level … the flexible deposit price of paper currency would behave as it actually did when the payment of paper currency for deposits was restricted in the United States during the banking crises of 1873, 1893, and 1907.
On his blog, Ben Bernanke weighs the pros and cons of negative (nominal) interest rates vs. a higher inflation target to create monetary “policy space.” His main points are:
- Lower rates work immediately. In contrast, a higher inflation target only works once agents’ expectations adjust. A higher target may not be politically tenable a thus, not be credible. In contrast, “institutional changes … [such] as eliminating or restricting the issuance of large-denomination currency, could expand the scope for negative rates.”
- Both negative rates and higher inflation have negative side effects. But the side effects of negative rates would materialize only during bad recessions.
- There are reasons to expect that higher inflation would impose a relatively larger burden on the “poor” while negative interest rates would impose a relatively larger burden on the “rich.”
- The political risks for the Fed associated with a higher inflation target may be substantial.
In the 18th Geneva Report on the World Economy, Laurence Ball, Joseph Gagnon, Patrick Honohan and Signe Krogstrup ask whether “central banks can do [more] to provide stimulus when rates are near zero; and … whether policies exist that would lessen future constraints from the lower bound.”
They are optimistic and argue that the unconventional policies of recent years can be extended: “[I]t is likely that rates could go somewhat further than what has been done so far without adverse consequences” and “[m]ore stimulus can be provided if policymakers increase the scale of quantitative easing, and if they expand the range of assets they purchase to include risky assets such as equity.” While the authors concede that QE might have negative side effects they argue that the benefits are worth the costs.
To relax the zero lower bound constraint in the future, Ball, Gagnon, Honohan and Krogstrup argue in favor of a higher inflation target. They view cashless societies as not imminent but possible.
The German Ministry of Finance has decided (p. 55, nr. 129a) that for tax purposes, negative interest rates are not to be treated as the opposite of positive interest rates. Instead they are considered fees. This treatment lowers taxable income to a lesser extent than would be the case under a symmetric treatment.