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The New Normal Should Be Cashless

The central bankers and economic policymakers who doubt that deep negative interest rates would prove effective in the next recession have not given that policy a fair chance. The fact is that in an environment of persistently low inflation and negative nominal interest rates, we need to rethink the effective lower bound entirely.

NEW YORK – In December 2019, the Swedish central bank departed from a negative-interest-rate policy that it had maintained for almost five years. The Riksbank’s repo rate (the rate at which it lends to commercial banks), which reached a low of -0.5% in February 2016, had risen to 0% by January. The latest rate hike comes despite signs that the Swedish economy is slowing, with inflation running below target.

In the event of a cyclical downturn, says Riksbank Governor Stefan Ingves, stimulus will need to come from government spending and asset purchases by the central bank, given the limited effectiveness of negative interest rates. “There actually is a lower bound for the policy rate,” Ingves argues, making it “hard to imagine that you would go negative to, say, minus 5 percent.”

I beg to differ. It may well be that, in a low-interest-rate environment, countercyclical fiscal policy can play a more prominent role in managing the business cycle without creating any debt-sustainability issues. Even so, negative interest rates have not been given a fair chance.

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