Martin Sandbu has written a typically measured and thoughtful response to Andy Haldane’s reflections on abolishing cash and setting negative interest rates.
On the substantive point – that Haldane has ommitted a better alternative – I think Martin and I are in agreement: in essence, the merits of money-financed cash transfers (helicopter drops) overwhelm the alternatives Haldane suggests. Simon Wren-Lewis makes the same point, with typical clarity.
Where Martin and I diverge, is over the merits of abolishing cash and setting negative nominal interest rates. To clarify, I do not view negative interest rates as ‘reckless’ or ‘shocking’ (these terms I reserved for Haldane’s other proposal!). After all, the ECB and SNB already have negative rates, and real cash rates are also negative in most of the developed world.
My concern is simply that there is very little evidence to suggest that lower rates from here will sustainably boost demand, and there are growing arguments supported by theory and empirical evidence that lower rates MAY be counterproductive. In my original blog, I referenced articles by Larry Summers, Glenn Stevens and Robert Merton, all of whom raise this concern. Haldane seems to simply assume lower rates are a stimulus.
Having said all that, I don’t have a huge problem with negative nominal rates under the current regime – I just have very low expectations for their success – and think they risk making matters worse. The efficacy of helicopter drops, by contrast, is virtually proven.
My ‘shock’ – which Martin cites – relates very specifically to ideas around abolishing cash. There are three reasons for this, two of which I outlined in my previous blog, and a third which Martin introduces and is implicit in Haldane’s thesis:
1) Cash is highly useful. Abolishing something useful – or trying to – results in a reduction in economic welfare.
2) Because cash is highly useful, abolishing it will result in resources being devoted to trying to continue to use it, or to find substitutes. This is also a reduction in economic welfare (and may also be a problem with negative nominal rates).
3) Martin suggests that abolishing cash might be helpful to the running of monetary policy – Haldane’s central argument. That seems to me to be the wrong way around: should we really reduce economic welfare in order to aid monetary policy? With this logic, we might get inflation up by damaging the supply-side of the economy too …
It genuinely seems bizarre to me to propose abolishing something extremely useful for the sole purpose of having negative nominal interest rates – when there are big question marks over the efficacy of lower rates, and when a much more robust alternative exists.
Of course, knowing how smart Andy Haldane is, we may all be falling for an obvious ruse. With one speech he has suddenly made money-financed cash transfers to households look mainstream and low risk – without even mentioning them. After all, the alternative is abolishing cash, forcing us to use ‘e-money’, and setting steeply negative interest rates …