It is a universal assumption that negative interest rates are impossible. In fact they have a long history. If an economy is in a liquidity trap, and has a negative equilibrium nominal interest rate, then due diligence if nothing else demands that the idea of negative rates be at least examined exhaustively. There is a literature but it is rather limited. Links are below.
Table of links:
| Date | Link |
| November 1999 |
Liquidity Traps: How to Avoid Them and How to Escape Them. An in-depth exploration of negative interest rates concluding they are the solution to a liquidity trap, but at a cost. Willem Buiter and Nikolaos Panigirtzoglou. The best paper LEDR has found on the subject. |
| September 1999 | Three Lessons for Monetary Policy in a Low Inflation Era. Federal Reserve Board. This document has almost certainly been central in the Fed's thinking during the 2001/3 ease. |
| June 1998 | Price Stability and Monetary Policy Effectiveness when Nominal Interest Rates are Bounded at Zero. Federal Reserve Board. |
| August 1998 | Krugman's famous argument prescribing a monetary solution to recessions and liquidity traps, originally using popsicle sticks as an example. Unfortunately the conclusion is asserted more than proven. "The answer is that an economy that is in a liquidity trap needs inflation — that is, it needs to convince people that the yen they are tempted to hoard will buy less a month or a year from than they do today." Yes, but HOW? |
| February 2002 | "The beach". A LEDR piece, currently in early draft form, building on the popsicle sticks to arrive at a more robust conclusion via negative interest rates. |
| Other Links | Fed 1999 BoJ Kimura BoJ on trap Svensson Svensson at KC Fed Buiter Home Krugman Krugman No Middle Fed on Deflation Meyer "Money Does Matter" Anders Grosen Int'l Herald Tribune on Japanese Neg. Rates January 2003 |
| Main index | William Porter |