Rising concern about the effectiveness of monetary policy at near-zero inflation rates has stimulated a debate among economists that challenges conventional thinking about whether interest rates really have a lower bound around zero per cent. A conference on the zero lower bound (ZLB) organised by Imperial College London, the Swiss National Bank, and CEPR last month attracted considerable interest.1 Indeed, some European central banks have policy rates below zero with no apparent adverse consequences.2 Further along the term structure, JP Morgan estimated earlier this year that more than a quarter of the entire European bonds market ($2 trillion) now has yields below zero.3

In one of its monthly surveys of leading UK-based macroeconomists, the Centre for Macroeconomics (CFM) asked for views of whether materially negative policy rates are really feasible, and whether the benefits of introducing reforms outweigh the costs. The survey period was between 17-20 June, and as such after the conference concluded.4


Prior to the Great Recession, inflation was low and close to official target rates in the advanced economies, and as such policy rates tended to deviate relatively little from their long-run average. Central banks responded to the large fall in demand in 2008-09 and the under-utilised resources by adjusting key policy interest rates to, or very close to, zero. The nominal return from holding cash is zero, as cash is a zero coupon bearer bond issued by the central bank.5 Therefore, it has generally been accepted that it is difficult for central banks to reduce their policy interest rates much below zero as cash can always be held as an alternative to negative interest rate bearing assets. The implication is that real policy interest rates have been limited to around negative 2-3% since the recession began, while appropriate real policy rates may have been (and may continue to be) significantly more negative.

Can reforms to the monetary system enable materially negative policy interest rates?

Some economists argue that it is perfectly possible to remove the ZLB on monetary policy.6 One idea is to reduce the importance of cash by withdrawing large bills and replacing them with electronic money, which can pay a negative interest rate.7 A second proposal, originally made in the early 20th century by German economist Silvio Gesell (1916, 1958), is for cash to be taxed and stamped on payment to generate a negative return and so be distinguished as legal currency. A third option, offered by Robert Eisler (1932), suggested that the implied unit fixed exchange rate between deposits and cash could be made variable. Deposit currency would be the numeraire and used for wage and price contracts and could carry a negative yield. The conversion rate of cash into the deposit currency would vary in line with the yield differential.

Others (for example, Hervé Hannoun8 at the Bank for International Settlements) have questioned the practical feasibility of these changes. First, there may be distributional consequences as savers receive negative returns, and the old and poor, who rely more on cash, may be disproportionately affected. Second, the financial system may be exposed to significant losses through defined benefit pensions and guarantees on nominal return contracts. Third, there may simply be too many political obstacles as, for example, electronic money implies tracking people’s transactions and the consequent erosion of privacy.

Q1. Do you agree that it is feasible for the UK authorities to change the monetary system so that materially negative policy interest rates could be safely implemented? (In answering, you may wish to explain your reasons and define your view of ‘material’.)

A total of 35 economists responded to this question in the CFM survey. Leaving aside those who neither agree nor disagree, only 32% of panellists agree or strongly agree that materially negative policy interest rates could be safely implemented. Where respondents indicate, ‘material’ is mostly taken to mean negative nominal 2-3%, although one respondent suggests negative 5%. Weighting by self-declared confidence in their answers, 29% agree or strongly agree with the proposition.

Of those who agree with the proposition, many point to the negative policy rates in other countries and some argue that there is scope for even further easing. Sushil Wadhwani (Wadhwani Asset Management and former member of the Monetary Policy Committee (MPC)), points to the Swiss National Bank’s policy rate at 0.75% while they have large denomination bills (CHF1,000 notes) without a stampede into cash. John Driffill (Birkbeck, University of London) notes the cost of holding cash in vaults for large banks and suggests negative 2-3% policy rates might be feasible. Ray Barrell (Brunel University London) suggests that the UK’s policy rate could be reduced “perhaps as low as negative 1.5% because of the cost of storing cash when the largest note in circulation is £50”.

Among those who disagree, many highlight the uncertainties in the risks and benefits of the necessary reforms. Sir Christopher Pissarides (LSE) notes that there “are great advantages to transparency and simplicity”, and changes to accommodate negative interest rates “will make both worse”. Patrick Minford (Cardiff Business School) reminds us that “cash is a low cost transactions medium, costless to produce and in welfare terms its use should be maximised”. Wouter Den Haan (LSE) notes that money is based on trust, which would be “severely negatively affected” if bank deposits were to have negative interest rates. Angus Armstrong (NIESR) asks what would happen to loans priced as a spread over policy rates and whether zero or negative mortgage rates make sense.

Other respondents note that reforms on the scale suggested would need political support. Sean Holly (University of Cambridge) indicates that in this context, ‘UK authorities’ really means Parliament. Dame Kate Barker (Credit Suisse and former MPC member) thinks that while this all may be feasible in theory, in practice “it would be rejected by the population”.

Do the benefits outweigh the costs?

There is a healthy debate about the UK’s economic outlook with ever present risks and uncertainty. Since early 2009, the Bank of England’s key policy rate has been 0.5% and the average real Bank rate has been negative 2.2%. The MPC has also sanctioned £375 billion of government bond purchases, financed by the creation of central bank reserves. According to the December 2017 futures contract, the market expects the Bank rate to be 2%, 17 months from now.

On the other hand, the current expansion has been underway since 2010, and the typical post-war expansion has lasted for seven years (with the exception of the 1992-2008 period). If the economy were to suffer a serious shock and recession before policy interest rates have begun to be normalised, then the ZLB may be a constraint on monetary policy. The apparent lack of monetary options may in fact cause precautionary behaviour and weaken demand. But the changes to the monetary system that would be necessary to allow materially negative policy interest rates and address the concerns mentioned in question 1 would perhaps involve significant transition costs.

Q2. Do you agree that the benefits of reforming the monetary system to allow materially negative policy interest rates outweigh the possible costs?

A total of 38 economists responded to this question in the CFM survey. Leaving aside those who neither agree nor disagree, only 26% of panellists agree or strongly agree that the benefits of reform outweigh the costs. Taking account of self-declared confidence in their answers, only 23% agree or strongly agree with the proposition.

Those who agree that the benefits outweigh the costs of reforms mostly see this as creating policy space for responding to possible future downturns. Michael McMahon, Warwick, notes that real rates have trended down over the last 30 years and that it seems more likely that “the ZLB will bind more, and more regularly in future business cycles”. John Driffill thinks that it may be worth having the capacity to introduce “some of these ingenious schemes” should the desired real interest rate become very negative. Sushil Wadhwani suggests that the feasibility of these options should be investigated in the near term as “policymakers need potential ammunition”. Note that the depth of reforms that respondents had in mind when answering this question is unclear.

Martin Ellison (University of Oxford) disagrees with the proposition, arguing that the costs would fall unevenly across different parts of society. Tony Yates (University of Birmingham) notes that “theoretical research and practical history show that monetary institutions are quite delicate”. Morten Raven (UCL) adds that the impact of such reforms is “sensitive to expectations traps – self-fulfilling equilibria in which a wave of pessimism takes the economy into a liquidity trap”.

Mike Wickens (Cardiff Business School and University of York) cautions that the policy may create hysteresis, whereby even a small rise in interest rates would become an important signal leaving “monetary policy in the UK paralysed”. Sir Charles Bean (LSE and former Bank of England deputy governor) suggests that we “really ought to be looking at ways to raise the equilibrium real interest rate”, such as structural reforms to encourage investment and discourage excess savings elsewhere.

Many of the respondents argue that the costs of removing the ZLB are high relative to other policy measures available. Several suggest raising the inflation target as an alternative and others argue that the correct response is more active fiscal policy if monetary policy is ineffective.


Eisler, R (1932) Stable money: The remedy for the economic world crisis; A programme of financial reconstruction for the international conference 1933, with a preface by Vincent C Vickers, London, The Search Publishing Co.

Gesell, S (1916, 1958) The Natural Economic Order, revised edition, London, Peter Owen Ltd, 1958; Originally published as Die natürliche Wirtschaftsordnung durch Freiland und Freigeld. Selbstverlag, Les Hauts Geneveys, 1916.

Hannoun, H (2015) “Ultra-low or negative interest rates: What they mean for financial stability and growth”, BIS Speech at Eurofi High-Level Seminar, Riga.

Keynes, J M (1936) The general theory of employment, interest and money, Chapter 23, London, Macmillan.

Kimball, M (2015) “Breaking through the Zero Lower Bound”, mimeo.


[1] See video presentations of the conference speakers on here.

[2] A number of European central banks have set negative policy interest rates. Denmark and Switzerland have negative 0.75% (central rate) policy interest rates and Sweden’s key policy rate is negative 0.35%.

[3] See ‘There are positives to negative yields’, Financial Times, 26 February 2015.

[4] An additional CFM survey on the merits of the pre-referendum rescue package for Greece has been published in the interim. Full results of the survey with experts’ comments are available athttp://cfmsurvey.org.

[5] The total return from cash also depends positively on a convenience yield and negatively on storage costs. The ZLB would be less binding if total return on cash would be negative.

[6] The most comprehensive references are to be found on Miles Kimball’s blog and see alsohttp://ftalphaville.ft.com/2015/01/19/2092852/buiter-the-snb-and-the-effective-lower-bound.

[7] For example, all residents could be given a debit payment card where deposits are held at the central bank and become the new legal tender and where the interest rate would be set by the central bank.

This article is published in collaboration with Vox EU. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Angus Armstrong is a Director of Macroeconomic Research, National Institute for Economic and Social Research. Francesco Caselli is a Professor of Economics at the London School of Economics. Jagjit Chadha is a Professor of Economics, University of Kent. Wouter den Haan is a Professor of Economics and Co-Director of the Centre for Macroeconomics, London School of Economics and CEPR Research Fellow.

Image: The Thames flood barrier is seen in front of London’s financial district of Canary Wharf at dawn. REUTERS/Russell Boyce