Paper short abstract:

Since 2012 central banks have introduced negative interest rates. This paper analyzes negative side effects including the risks to financial stability, distributional effects and global imbalances. We discuss ideas such as higher inflation goals and assess the concept of independent central banks.

Paper long abstract:

During the global financial crisis, major central banks have cut their interest rates rates to around zero which was usually regarded as the lower bound. In the following, additional monetary easing was implemented including forward guidance and asset purchase programs. This policy mix resulted in a considerable drop in nominal and real policy rates. However, central bank policies had not the desired effects. Since 2012, some central banks ignored the zero lower bound and dropped interest rates into negative territory, including the European Central Bank, the Swiss National Bank, the Danmarks Nationalbank, the Swedish Riksbank and the Bank of Japan. The central incentive for the implementation of a new monetary policy framework was the requirement to stabilize inflation expectations and to boost output growth.

Analyzing negative interest rates (NIR) at all those central banks, this paper is looking at the following questions: (A) How did central banks implement NIR? (B) What are the differences of NIR between Japan and central banks in Europe? (C) What are the benefits and costs of NIR? This paper discusses some negative side effects of NIR including weakening bank profitability and destabilization of financial stability, distributional effects and outside effects such as currency depreciation. We provide some prospects for central banks discussing potential new ideas such as higher inflation targets and helicopter money. In addition, implementing negative interest rates means that we have to re-assess the concept of independent central banks as these policies do not necessarily follow the will of the general public or elected politicians. In sum, NIR have a place in the arsenal of central banks, but - given their negative domestic and global implications - the benefits of these policies seem to be outweighed by uncertainties and risks.

Key words: Negative nominal interest rate, Monetary policy, Quantitative easing, Bank of Japan, European Central Bank, Central bank independence