Brookings conference on negative IOR (pt. 1)

I spent almost 3 hours watching the morning session of the recent Brookings conference on negative interest on reserves. Tomorrow another 3 hours, which may have more material of great interest (Kimball, Bernanke, etc.)  But today’s presentations were very good, and deserve a post.

I am indebted to JP Koning for directing me to the best part, after the 1:15 mark, where a lady from the Swiss National Bank was asked why the Japanese yen appreciated after the BOJ introduced negative IOR.  I was very glad to see her give the same answer that I’ve been giving; it didn’t appreciate, it depreciated.  She explained that you need to look at the market reaction in the hours after the announcement, not the move in the yen over the next few weeks.  When you do so, you find the yen is no different from the other currencies that adopted negative IOR—the effect is expansionary, as evidenced by the fall in the yen.  She also points out that all monetary stimulus tends to depreciate currencies, whether rates are positive or negative.  Hence the exchange rate is not some sort of special channel that is only operative at negative IOR.

The discussion of Denmark was kind of interesting.  There are actually some adjustable rate mortgages in Denmark that have recently gone negative.  Not many, because the mortgage rate is above the short term risk free rate, but a few.  In addition, the tax authorities now have to worry about people paying taxes too soon, which leads to new tax rules.  Corporate dividends have increased since negative IOR was introduced, perhaps because large institutional bank accounts offer negative rates while small retail accounts are generally set at zero.  So smaller savers earn more on their cash than big corporations.  Listening to the discussion you begin to realize that if rates stayed significantly negative for an extended period, then the public’s way of handling money would gradually evolve in unexpected ways.

The Swiss like their SF1000 bills (roughly $1000) and use them frequently.  Another Swiss expert confirmed that the currency appreciation last year had slowed inflation and reduced RGDP about as much as expected, but that the SF had now fallen to about where they wanted it—which confirms a recent post of mine.

Even the German hawk that I did not agree with gave a very impressive presentation.

HT:  Patrick Horan


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15 Responses to “Brookings conference on negative IOR (pt. 1)”

  1. Gravatar of Benjamin Cole Benjamin Cole
    8. June 2016 at 20:51

    http://www.snb.ch/en/iabout/cash/id/cash_circulation

    Swiss CHF banknotes in circulation have risen to about CHF 70,000 million in 2015 from CHF 40,000 million in 2007.

    The Swiss National Bank says “The high proportion of large denominations indicates that banknotes are used not only as a means of payment but also – to a considerable degree – as a store of value.”

    Oh, duh. And maybe to avoid taxes too.

    A high-tax, low-inflation or deflation economy seems like it must fall apart. People will migrate to cash to avoid taxes, noisome paperwork, government snooping.

    You get the tilting table problem: As more people move underground, higher taxes must be levied on that still above-ground, which pushes more people underground.

    John Cochrane suggested to get to a zero-inflation nirvana, we eliminate cash. Until he realized that meant Uncle Sam would then have a copy of not only of every phone call and email but then also every transaction.

    Makes 1984 look like a picnic with Bob Spongepants.

    Maybe 3% inflation is better idea.

  2. Gravatar of Benjamin Cole Benjamin Cole
    8. June 2016 at 20:53

    My bad: That is a picnic with SpongeBob SquarePants.

    Who is not running for U.S. President, or as Hillary’s or Trump’s veep.

    As of now.

  3. Gravatar of Niklas Blanchard Niklas Blanchard
    8. June 2016 at 21:37

    Scott,

    I’m not so sure that the ways in which the public rid themselves of cash under negative rates can be considered “surprising”. At least not the paying taxes early part. Irving Fisher wrote a book about the experience of Worgl, Austria (Stamp Scrip). You can read about it here as well:

    http://monetary-freedom.net/reinventingmoney/muralt-worgl_experiment_depreciating_money.html

  4. Gravatar of Effem Effem
    9. June 2016 at 07:43

    I still don’t understand your infatuation with the trading window immediately after an event. Consider individual equities. Very often, a company will report earnings and gap sharply up or down…only to be reversed a few hours or days later and typically with no significant new information. This happens on a daily basis in very liquid and well-understood securities. The market often changes how it reacts to a piece of news over hours/days. To take that trading window as “gospel” you would very often be completely incorrect in your analysis of the true market reaction.

  5. Gravatar of ssumner ssumner
    9. June 2016 at 07:57

    Ben, Yup, 3% inflation is better than 1984.

    Niklas, Good point. Of course Gesell’s stamped money plan achieved quite a bit of attention back then.

    Effem, First of all it’s not my “infatuation”, it’s the standard way economists look at event studies. Second, I agree that new information can later result in further moves, but the point is that we have no way of knowing whether the further changes reflect the impact of negative IOR, or some other factor. So the event study is the best we have. Not perfect, but the least bad test.

  6. Gravatar of Gary Anderson Gary Anderson
    9. June 2016 at 10:39

    Denmark inflation is increasing. That is what they want. But question, aren’t negative bond yields, which accompany negative IOR, contractionary? Doesn’t that offset the expansionary value of negative IOR?

  7. Gravatar of Ray Lopez Ray Lopez
    9. June 2016 at 11:04

    Sumner: “I am indebted to JP Koning for directing me to the best part, after the 1:15 mark, where a lady from the Swiss National Bank was asked why the Japanese yen appreciated after the BOJ introduced negative IOR. I was very glad to see her give the same answer that I’ve been giving; it didn’t appreciate, it depreciated. She explained that you need to look at the market reaction in the hours after the announcement, not the move in the yen over the next few weeks.”

    This is ludicrous. What the short-term move shows is traders think like Sumner and the lady from SNB short term, but, long term, money is neutral and driven by factors other than short term emotions. Equivalently, NGDPLT will give a short term –maybe–several hours boost, but that’s hardly anything to get excited about. Sumner, you should switch to viewing chess at chessbomb.com, it’s much more exciting than the slop you’re consuming.

  8. Gravatar of Major.Freedom Major.Freedom
    9. June 2016 at 17:05

    Negative IOR reduces the supply of reserves in the banking system. It is a distortionary tax. It is deflationary.

    “When you do so, you find the yen is no different from the other currencies that adopted negative IOR—the effect is expansionary, as evidenced by the fall in the yen.”

    The fall in the exchange value of the Yen in the international FX market does not constitute evidence of more Yen.

    If your labor value declines, does this constitute evidence you are working longer hours?

    If the price of hoola hoops declines, does this constitute evidence there are more hoola hoops?

  9. Gravatar of Carl Carl
    9. June 2016 at 21:13

    Major Freedom:
    Are you more likely to sell your hula hoop today if hula hoop storage is free or if it costs you ten cents a day to store it?

  10. Gravatar of Gary Anderson Gary Anderson
    9. June 2016 at 22:51

    @Major you said something interesting: “Negative IOR reduces the supply of reserves in the banking system. It is a distortionary tax. It is deflationary.”

    Theoretically negative IOR forces more lending. That must be what Scott Sumner says is expansionary. But, some banks are threatening to take their money away from the central bank and just store it in vaults. Is that what you are referring to when you say negative IOR is deflationary?

  11. Gravatar of David Pinto David Pinto
    10. June 2016 at 05:15

    There’s a great Sponge Bob episode on mass production versus the value of handmade construction.
    http://spongebob.wikia.com/wiki/Neptune's_Spatula

  12. Gravatar of ssumner ssumner
    10. June 2016 at 06:13

    Ray, What is an AS/AD graph? You can find out in a EC101 textbook.

    Thanks David, I used to watch SpongeBob when my daughter was young.

  13. Gravatar of ChargerCarl ChargerCarl
    10. June 2016 at 11:58

    Scott, apparently your marriage is now illegal in China:

    http://www.eastasiatribune.com/north-asia/china-bans-interracial-marriages-for-females-no-plans-to-restrict-men/

  14. Gravatar of Ray Lopez Ray Lopez
    11. June 2016 at 02:23

    @Sumner – I know perfectly well what AD/AS curve are, however, you, as a professor, either don’t know that AS slopes downwards (is not vertical), cannot explain why your AS curve is vertical, and, tellingly, for all the pixels wasted here, neither can your readers.

  15. Gravatar of Scott Sumner Scott Sumner
    12. June 2016 at 06:47

    Chargercarl, Maybe, but I would not trust that news source.

    Ray, If you understand what an AS/ASD graph is, then why did your criticize the way I drew an AS/AD graph in a post where I did not even provide an AS/AD graph?

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