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Fiona Maclachlan

1 INTRODUCTION One of the most surprising recent developments in financial markets has been the emergence of negative yields on market-traded bonds. As of August 2017, $9 trillion of negative-yield debt ( Platt and Faunce 2017 ) was outstanding. The negative yields have emerged mostly on government bonds, but there have been cases of negative rates even on corporate bonds ( Jackson 2016 ). This development contradicts the notion that nominal interest rates are bounded at zero, which, until recently, was the conventional wisdom. A parallel development has been the

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Domenica Tropeano

1 INTRODUCTION This paper examines the policy of applying negative interest rates on the reserve facility at the European Central Bank (ECB). Most studies on this topic either support the claim that it favours credit expansion to the real sector or argue, particularly on the Post-Keynesian side, that no expansion in loans is to be expected because reserves do not fund loans (see Rochon and Rossi 2007 ; Fullwiler 2017 ). I will relate this policy to the institutional circumstances in which it has been implemented, within a dysfunctional currency union and with

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Matheus R. Grasselli and Alexander Lipton

1 INTRODUCTION There is nothing abnormal, in principle, about negative interest rates. Instead of receiving a positive return in an investment, it is entirely possible to be charged for holding an asset, especially if all other available assets are deemed to be less safe. Nevertheless, positivity used to be considered an essential property in rigorous formulations of axiomatic interest rate models ( Flesaker and Hughston 1996 ; Rogers 1997 ). The key argument was that, while real interest rates could be either positive or negative depending on the rate of

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Edited by Louis-Philippe Rochon and Sergio Rossi

Nominal interest rates are generally conceived as positive magnitudes, mirroring the notion that borrowers pay the lender a positive rate of interest on the funds borrowed. Contrary to what is commonly argued in the literature, a constraint on nominal interest rates does not technically exist. This implies, in practice, that nothing prevents nominal (market or policy-controlled) rates of interest from falling below zero and assuming negative values. Should this be the case, then the interest rate would act as a “tax” on the lender, who, at least in nominal

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Sergio Rossi

exchange rate and replaced it with a negative interest-rate policy. The argument was that such a floor was ‘no longer justified’ owing to the weakening of the Swiss franc against the US dollar. Instead, an acceptable exchange rate could be sustained by a negative interest rate, which induces agents to reduce their demand for Swiss-franc deposits in favour of other currencies. This belief in negative interest rates as the right policy instrument for reducing Swiss franc overvaluation and managing domestic demand has been repeated several times by each of the three current

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Yannis Panagopoulos and Ekaterini Tsouma

address low inflation. One such measure was the lowering of the policy interest rates which, in some instances, were pushed into negative territory. That was the case in the eurozone, where the European Central Bank (ECB) set the Deposit Facility at a negative value for the first time on 11 June 2014. As noted in the related literature (see Coeuré 2016a ; Jobst and Lin 2016 ; etc.), implementation of a negative interest rates (NIR) regime can have significant positive spillover effects on bank policy and, consequently, on the overall economy. However, it can also pose

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Thomas I. Palley

absent a ZLB, the economy still might not reach full employment. The proposed Keynesian critique is therefore a double critique. First, it is a critique of the ZLB explanation of stagnation. Second, it is a critique of the classical doctrine of the NRI, in that there may be no rate of interest that delivers full employment goods market clearing given existing conditions. Furthermore, in such a world, negative nominal interest rates may even aggravate the problem of aggregate demand (AD) shortage. 2 A PRELIMINARY EXPOSITION OF THE KEYNESIAN CRITIQUE The Keynesian

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Thomas I. Palley, Louis-Philippe Rochon and Guillaume Vallet

easing (QE) in 2008, which was initially a policy to contain the financial crisis, but then became a policy for combatting the disappointing recovery. After that, in late 2014, came the adoption of negative interest-rate policy (NIRP). The turn to NIRP reflects the breakdown of the macroeconomic model that guided monetary policy in the decade before the Great Recession. For central bank and mainstream economists the challenge has been to explain that breakdown, and it has given rise to zero lower bound (ZLB) economics. The argument is the Great Recession caused the

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Olivia Bullio Mattos, Felipe Da Roz, Fernanda Oliveira Ultremare and Guilherme Santos Mello

1 INTRODUCTION In the ten years since the first effects of the 2007/2008 financial crisis, policymakers in developed countries have tried several unconventional approaches 1 to monetary policy (MP) to deal with the lack of economic growth: quantitative easing, large-scale asset purchases, and ultra-low and negative nominal interest rates, among others. Negative nominal interest rates (NNIR), particularly, were previously inconceivable in economic textbooks and are now a reality for several countries. John Maynard Keynes, in chapter 24 of The General Theory (GT

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Steven Pressman

1 INTRODUCTION Macroeconomics today is quite unlike macroeconomics in the past, particularly regarding interest rates. Homer and Sylla (2005) proffer no instances, throughout 5000 years of human history, of nominal interest rates going negative, although the Swiss National Bank did push rates on foreign deposits below zero in the 1970s to prevent capital inflows and currency appreciation. Yet shortly after the last edition of their classic work was published this was no longer true. During the Great Recession, central banks lowered interest rates below zero on