"There is some evidence of a decline in loan and bond rates following the implementation of NIRPs [negative interest rate policies]. Banks’ profit margins have remained mostly unchanged. And there have not been significant shifts to physical cash. That said, deeper cuts are likely to entail diminishing returns, as interest rates reach their “true” lower bound (at which point agents shift into cash holdings). And pressure on banks may prove greater; especially in systems with larger shares of indexed loans and where banks compete more directly with bond markets and non-bank credit providers. ... On balance, the limits to NIRPs point to the need to rely more on fiscal policy, structural reforms, and financial sector policies to stimulate aggregate demand, safeguard financial stability, and strengthen monetary policy transmission."For those who instinctively recoil from the notion of a negative interest rate, it's perhaps useful to remember that it has occurred quite often in recent decades. Any time someone is locked into paying or receiving a fixed rate of interest, and then sees inflation move up, a negative interest rate results. Thus, back in the 1970s and early 1980s, lots of Americans were receiving negative interest rates if they had money in bank accounts or Treasury bonds, and were paying negative interest rates if they already had a fixed-rate mortgage. In short, the innovation here isn't that real inflation-adjusted interest rates can be negative, but rather that a nominal interest rate is negative.
"The idea of one country having two different currencies with an exchange rate between them may seem implausible, but the basics are not difficult to explain. The first step in setting up a dual currency system would be for the government to declare that the “real” currency is electronic bank reserves and that all government contracts, taxes, and payments are to be denominated in electronic dollars. As we have already noted, paying negative interest on electronic money or bank reserves is a nonissue. Say then that the government wants to set a policy interest rate of negative 3 percent to combat a financial crisis. To stop a run into paper currency, it would simultaneously announce that the exchange rate on paper currency in terms of electronic bank reserves would depreciate at 3 percent per year. For example, after a year, the central bank would give only .97 electronic dollars for one paper dollar; after two years, it would give back only .94. ...Rogoff recognizes that negative interest rates raise a number of practical and economic problems, including issues of regulatory, accounting, and tax policy. But from his perspective, negative interest rates are the best of the alternatives when a central bank faces the problem of a zero lower bound on interest rates. For example, quantitative easing only seems to have mild effects, while exposing the central bank to political pressures about who gets the loans from the central bank. Re-setting the central bank inflation target from 2% to 4% might help push up nominal interest rates, and thus allow those rates to be cut in a future recession while remaining above-zero, but given that central banks have spent decades establishing their goal of 2% inflation in the minds and expectations of financial markets, such a shift isn't to be contemplated lightly. Looking at these and other policy options--like all countries simultaneously trying to weaken their currencies in order to boost exports--Rogoff argues that negative interest rates are the simplest and cleanest option, with the best chance of working well.
"In most advanced countries, private agents are free to contract on whatever indexation scheme they prefer; this is not a condition that can be imposed by fiat. If the private sector does not convert to electronic currency, the zero bound would re-emerge since it still exists for paper currency. Finally, one must consider that after a period of negative interest rates, paper and electronic currency would no longer trade at par, which would be an inconvenience in normal times. Restoring par would require a period of paying positive interest rates on electronic reserves, which might potentially interfere with other monetary goals."