A Look at Negative Interest Rates
We are on the precipice of change. The way our institutions approach macroeconomics could see the biggest change since the 1990s. This revolution has been precipitated by the economic fallout from the Covid-19 crisis. But it’s been a long time coming- the breakdown of monetary policy is the underlying cause that has prompted a more serious consideration of using negative interest rates to bolster the economy.
There have been two, arguably three, major shake-ups in how policymakers have done their jobs. The first gave birth to macroeconomics itself- John Maynard Keynes’ commentary regarding the Great Depression showed how the market doesn’t always readjust itself, and that government intervention is necessary in recessions. As Keynes put it, “in the long run, we are all dead”. Government stimulus was to be paid for by debt if needed, which was in turn be serviced during the good times.
But this couldn’t fix the stagflation of the 1970s, where low economic growth was coupled with high inflation. Milton Friedman, the father of monetarism, argued that controlling the money supply was the best way to maintain living standards in the long term. Economic efficiency and low and stable inflation were to be prioritised at the immediate expense of employment. His brand of neoliberalism influenced Thatcher and Reagan, as well Paul Volcker, the US Federal Reserve’s…
