How can central banks impose negative interest rates without causing cash hoarding?

or

A primer on negative interest rate policy as a new tool in the monetary policy toolkit

or

Eliminating the Zero Lower Bound on Interest Rates

(I recommend that readers not follow any of the links until they had read this blog post in its entirety. The links are intended to provide supporting evidence and make further exploration possible.)

(I have provided key dates so that readers can get a sense of the time lag associated with the dissemination of a new idea such as the one being discussed in this article.)

I performed a Google search on "negative interest rate policy theoretical underpinnings". The 4th highest result was a link to an academic paper by Harvard-educated economist Miles Kimball, published by National Institute Economic Review in Nov. 2015.

Here's my own concise summary of negative interest rate policy.

Why impose a negative interest rate as monetary policy? 

In order to lower the profitability hurdle on investment projects: it reduces the cost of debt financing. For example, in housing, mortgage rates would drop as a result. 

On some level, it's the same old matter of cutting interest rates to stimulate growth.  During serious recessions, negative interest rates are the key to quick economic recovery. 

Which interest rate are we talking about? 

The shortest term interest rate, the one that can be set by a central bank. Whatever happens to yields on longer maturity bonds is a separate matter, i.e. a matter of market clearing.

But won't this cost savers and depositors? 

No, because having, say, a negative 4% interest rate for one year is better than essentially a 0% interest rate from 2009 and ongoing. Once economic growth resumes, a central bank can raise interest rates into the positive range.

But won't this cause hoarding of cash? 

No, because paper money will be "made" to be less valuable than electronic money. E.g. A $100 bill would be made to have the purchasing power of, say, $96 of electronic money. By analogy, today when a consumer uses a credit card to make a $100 purchase, the retail store receives about $97 because of the cut taken by the credit card company.

How will they "make" paper money less valuable than electronic money? 

By imposing a deposit fee on paper money. I.e. Depositing paper money into a bank account will incur a fee. (Kimball says that this fee would need to be charged only when banks deposit cash at the central bank. I'm guessing that banks would charge savers a similar fee when they make deposits into their bank accounts.) This fee ought to reduce savers' incentive to hoard cash. 

This deposit fee should grow with time so long as negative interest rats are in effect. Kimball says, "From a technical point of view, we know how to eliminate the "zero lower bound"".

What will happen to other asset prices such as gold? 

Any asset whose price is free to fluctuate will rise under negative interest rates in order to result in a lower future rate of return. Examples: gold, IG (investment grade) corporate bonds, consumer staples equities, telecom equities, utilities equities. (I ask myself how this is different from hoarding; it may not be hoarding, but it would be shifting out of cash.) 

This is also bullish for the US dollar as an international currency if we believe that other countries will implement negative interest rate policies before the US, as is the case today in 6 countries.

List of countries with negative interest rates today

Japan, Euro area, Sweden, Switzerland, Denmark, Hungary. A total of six.

Earliest to implement was Sweden sometime after May 2015. 

Largest negative interest rate today is -0.75% in Switzerland. 

Japan announced negative interest rates in Jan 2016, but they didn't become effective until April 2016, but they didn't implement a deposit fee on paper money.

None of the others in the above list have depreciated paper currency relative to electronic currency. If Twitter postings are good evidence, they are watching and monitoring cash hoarding. (The hashtag #NegativeRates is a good one to search on. Click here to perform this search in Twitter.)

Here's a list of countries by central bank interest rates, possibly not up to date.

(This begs the question as to why the Japanese yen has been strengthening given a negative interest rate policy in that country since last April ... Alternatively, it could be that negative interest rates are a tool for countering a country's appreciating currency ...)

What is the essential idea behind implementing negative interest rates? 

The essential idea is to make paper money separate and distinct from electronic money; to make paper money less valuable than electronic money. In a sense, the real money would be electronic money. There would be an exchange rate between the two types of money. In normal times, this exchange rate would be 1:1. Whenever negative interest rates prevailed, the exchange rate would be something like 1 unit of electronic money being worth 0.96 of paper money.

Political & psychological hurdles

All of the following have to come on board: economist community, the public, legislature, the central bank. 

Ben Bernanke's primer on negative interest rate policy fails to mention that paper money would take on an inferior role (less valuable) to electronic money. This may be the biggest hurdles.

Discussion

It's not clear whether we should try fiscal policy before trying negative interest rates. Perhaps "helicopter money" will be tried first. 

It's also not clear whether investment rates will increase as a result of a lower cost of debt financing: if there's no aggregate demand, who is going to buy the newly produced goods and services? Nevertheless, cutting interest rates in order to stimulate economic growth is standard monetary policy, but in the past, this has always entailed dropping rates from a higher positive rate to a lower positive one (but never to a negative one).

Negative rate policy assumes that the long run equilibrium interest rate is positive (which is a reasonable assumption), meaning that negative short term interest rates will be nothing but transitory.

Further exploration

Coming up to speed on negative interest rate policy

1. Kimball's 5-minute video on negative interest rate policy, May 2015. 
2. Economic underpinnings of negative interest rates, blog article dated July 2013. Conceptually important!
3. A qualitative introduction to the economics of negative interest rate policy, blog article dated Oct. 2013.
4. Kimball's 20-minute video on negative interest rate policy, June 2016. This was a talk given at the Brookings Institute in the presence of Ben Bernanke and other central bankers and economists. Kimball thinks that the US won't need to go to negative interest rates for another five years, i.e. not before 2021. The moderator thought it wouldn't happen in his lifetime and he stated his age as 73. Ken Rogoff has a relevant book coming out in August 2016 entitled "The Curse of Cash" which calls for eliminating paper money; it is apparently endorsed by Ben Bernanke and Mohammed El-Erian. 

Dissemination of this idea

1. Total of 36 talks given by Miles Kimball over 33 months from May 2013 to Jan 2016. See list here.
2. Central banker support for negative interest rate policy, as of July 2015. 

Academic papers authored or co-authored by Miles Kimball on the subject

1. IMF working paper, Oct. 2015. 
2. Paper published in National Institute of Economic Review, Nov. 2015.

Information vault

1. Kimball's homepage for "crossing the zero lower bound" on interest rates. 

Author is also on Twitter

Effect of Debt on Economic Growth:

Is it positive or negative?

or

Is Austerity the Right Policy Response to High Debt Levels?

This article introduces Miles Kimball, a Harvard-educated macroeconomist. It also shows how current macroeconomic thinking is in flux.

(I recommend reading this blog post in its entirety before following any of the links. The links are intended to serve as supporting evidence and provide the opportunity to explore further.)

Around 2009, Harvard economists Carmen Reinhart and Kenneth Rogoff performed data analysis to conclude that high debt levels slow down economic growth. I happened to read about this in their 500-page book entitled "This Time Is Different", published in 2009 and reprinted in 2011, wherein they examined 8 centuries worth of historical evidence. 

Later, in 2013, Reinhart and Rogoff's conclusion was refuted through further data analysis by Amherst researchers and also by Harvard-educated economist Miles Kimball and colleagues. (Link to Kimball's profile on Wikipedia; link to his home page; link to his blog.)

The controversy itself is described in Wikipedia here.  At the end of this Wikipedia article, there's a quote from Nobel Prize-winning Princeton economist Paul Krugmann indicating that he agrees with Kimball's and others' refutation of Reinhart and Rogoff's assertion.

• Kimball's first blog on this matter. (This was the starting point for my article. Before that, I stumbled upon Miles Kimball through the following Tweet and listened to him firsthand in this podcast dated May 9, 2016. There, I found out that he had recently spoken at the Bank of England along with Kenneth Rogoff who had sided with him, apparently.)

• Kimball's second blog on this matter. 

• Kimball's blog home page containing both blogs. This home page is a subset of his blogs and is confined to "short run fiscal policy".

My summary of Kimball's analysis is the following.

Although low economic growth causes high debt levels, it's not true that high debt levels cause low economic growth. 

Policy implication: austerity is not the right policy response to high debt levels.

Kimball isn't all out in favor of debt either. He ends his second blog with the following:

"It is painful enough that debt has to be paid back (with some combination of interest and principal), and high levels of debt may help cause debt crises like those we have seen for Ireland and Greece. But the bottom line from our examination of the entrails is that the omens and portents in the Reinhart and Rogoff data do not back up the argument that debt has a negative effect on economic growth." [emphasis mine]

Author is also on Twitter