Must-Read: Joe Gagnon: Negative Interest Rates: A Useful But Limited Tool

Must-Read: There is a debate that may be semantic and may be substantive with respect to whether a higher inflation target is in some sense a “policy” or a “tool” or not. I find myself of more than two minds about this. But by not including it on his list of things he prefers to negative interest rates alongside QE, Joe Gagnon implicitly reaches the conclusion that monetary régime change is not on the menu:

Joe Gagnon: Negative Interest Rates: A Useful But Limited Tool:

The disadvantages of paper currency are not so large as to allow for unlimited negative interest rates….

The Geneva Report shows that for negative rates down to -0.75 percent, there is little evidence of any large-scale shift into paper currency. But, especially if rates are expected to stay negative for a long time, there may not be a lot of room to cut further before triggering such a shift, which would mark the true lower bound on interest rates. Overall, it appears that other policies, notably large-scale asset purchases or QE, offer greater opportunities for monetary stimulus if and when it is needed.