Wednesday, March 26, 2014

Marshall Auerback — Negative Interest Rates Is Fiscal Austerity By Another Name

The European Central Bank has started to debate the idea of negative deposit rates, as a means of slowing inflows into the currency and curb the euro’s strength. Interestingly enough, after appearing to oppose the idea a few months ago, Bundesbank chief Jens Weidman now says that a negative deposit rate could be a way to address the impact of a strengthening currency....
The impact such a step would have to improve bank lending to companies and households was, however, “debatable”, he said.
Well it won’t improve bank lending for the simple reason that he’s got the causation wrong: loans create deposits, not the other way around....
More to the point, negative interest rates on deposits penalize savers. 

3 comments:

mike norman said...

Summers' "brilliant" idea propagating now.

So amazingly, mind numbingly ignorant. Blows your mind.

Dan Kervick said...

The issue isn't whether loans create deposits or vice versa, but whether lending and borrowing behavior are price sensitive.

Ralph Musgrave said...

The basic absurdity of negative interest rates is that they can lead to negative production, i.e. wealth destroying forms of economic activity. That absurdity supports what I think is the MMT policy of adjusting stimulus by adjusting the amount of money that the government / central bank creates and net spends into the economy, while leaving interest rates to find their own level.