|
|
The notion of an effective lower bound on policy interest rates, that is lower than zero, has become a concrete concern for monetary policy. While the effective lower bound for short-term rates exists, it does not impose a binding constraint on the effectiveness of monetary policy. There are tools for dealing with the lower bound constraint, which at the ECB go under the name of "non-standard monetary policy measures".
“We saw that the short-term interest rate going below zero does not pose the difficulties for monetary policy.”
“A negative deposit rate can also complement our asset purchase programme by inducing banks which are selling securities to the Eurosystem, and receiving bank reserves in return, to lend on those balances. It compensates the lack of capital relief for banks in a regulatory environment which treats government bonds as risk free. In this way it can increase the velocity of circulation of reserves and accelerate the portfolio rebalancing transmission channel.”
While removing the effective lower bound by abolishing cash can be envisaged, it should be based on changing technologies and social perceptions, not of policy prescriptions. Also political capital could be better spent on structural reforms of euro area economies, which would raise the natural real rate of interest and thereby make the lower bound less binding.