I spent almost 3 hours watching the morning session of the recent Brookings conference on negative interest on reserves. Tomorrow another 3 hours, which may have more material of great interest (Kimball, Bernanke, etc.) But today’s presentations were very good, and deserve a post.
I am indebted to JP Koning for directing me to the best part, after the 1:15 mark, where a lady from the Swiss National Bank, was asked why the Japanese yen appreciated after the BOJ introduced negative IOR. I was very glad to see her give the same answer that I’ve been giving; it didn’t appreciate, it depreciated. She explained that you need to look at the market reaction in the hours after the announcement, not the move in the yen over the next few weeks. When you do so, you find the yen is no different from the other currencies that adopted negative IOR—the effect is expansionary, as evidenced by the fall in the yen. She also points out that all monetary stimulus tends to depreciate currencies, whether rates are positive or negative. Hence the exchange rate is not some sort of special channel that is only operative at negative IOR.
The discussion of Denmark was kind of interesting. There are actually some adjustable rate mortgages in Denmark that have recently gone negative. Not many, because the mortgage rate is above the short term risk free rate, but a few. In addition, the tax authorities now have to worry about people paying taxes too soon, which leads to new tax rules. Corporate dividends have increased since negative IOR was introduced, perhaps because large institutional bank accounts offer negative rates while small retail accounts are generally set at zero. So smaller savers earn more on their cash than big corporations. Listening to the discussion you begin to realize that if rates stayed significantly negative for an extended period, then the public’s way of handling money would gradually evolve in unexpected ways.
The Swiss like their SF1000 bills (roughly $1000) and use them frequently. Another Swiss expert confirmed that the currency appreciation last year had slowed inflation and reduced RGDP about as much as expected, but that the SF had now fallen to about where they wanted it—which confirms a recent post of mine.
Even the German hawk that I did not agree with gave a very impressive presentation.
HT: Patrick Horan