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Negative interest rates : made for Switzerland

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Jean-Pierre Danthine

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The most recent innovation in monetary policy, negative interest rates, has not had a good press. Aside from the feeling of “financial repression” (1) created by negative rates, the question of their efficacity arises, and the answers vary. Some of the literature focuses on the weakening of the banking sector’s lending capacity that can result from the interest expense thereby created. The problem, however, takes on a different tone in the case of an economy with a safe-haven currency like the Swiss economy. Its particularity results in the necessity, for the Swiss, of a negative interest differential with the euro zone. Assets denominated in francs provide insurance against low-probability negative shocks, since the franc appreciates in times of crisis. If no price is attached to this insurance policy – in the form of returns, in normal times, lower than the standard for equivalent assets in foreign currencies – then Swiss assets would be the dominant assets, which cannot constitute an equilibrium.

In this article, Danthine examines the consequences of the safe-haven characteristic, noting that it makes the lower bound constituted by the zero interest rate particularly restrictive. It is not surprising then that the Swiss National Bank (BNS) has been at the forefront of monetary innovation in relation to negative rates. The aim has been to restore an interest rate differential that discourages net inflows of capital by encouraging savers and resident investors to invest outside the country. As mentioned, the recourse to negative rates is controversial. In the case of the Swiss economy, this aversion should be overcome. Even if we come to a pessimistic conclusion about the macroeconomic potential of negative rates in a closed economy (that is, leaving aside their impact on currency exchange rates), when interest rates in large economic zones are close to zero (likewise if they are negative), a small, open economy with a safe-haven currency has no alternative to negative rates, because otherwise it must accept structural weakening and a loss of economic substance, which would gradually eliminate – but at what a cost! – its currency’s safe-haven status.

For Danthine, the prospects of secular stagnation and persistently low rates make a new appreciation of the importance and utility of negative rates imperative for an economy like the Swiss. If low rates are expected to continue, then the National Bank’s room for manoeuvre must be widened. That would be possible if it were authorised to levy a fee on withdrawals of abnormal amounts of paper money by big money traders. Simultaneously, it should maintain or increase existing exemptions – today, negative rates apply only to financial institution deposits with the BNS that exceed twenty-fold the required reserves. These exemptions greatly relieve the load of negative rates on banking institutions and allow them not to pass on the costs to individual deposits. It would thus be possible to impose significantly lower rates than prevail today and to restore an interest differential close to the historical average.

(1) Intervention of a state in the banking sector for the benefit of the finance system or the state itself

Original title : Les taux négatifs: made for Switzerland
Published in : Monetary Economic Issues Today, Mélanges en l’honneur de Ernst Baltensperger, Orell Füssli Verlag AG, Zürich 2017
Available at :égatifs-made-for-switzerland.pdf
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