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Why ZLB Economics and Negative Interest Rate Policy (NIRP) are wrong

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  • Thomas I. Palley

Abstract

NIRP is quickly becoming a consensus policy within the economics establishment. This paper argues that consensus is dangerously wrong, resting on flawed theory and flawed policy assessment. Regarding theory, NIRP draws on fallacious pre-Keynesian economic logic that asserts interest rate adjustment can ensure full employment. That pre-Keynesian logic has been augmented by ZLB economics which claims times of severe demand shortage may require negative interest rates, which policy must deliver since the market cannot. Regarding policy assessment, NIRP turns a blind eye to the possibility that negative interest rates may reduce AD, cause financial fragility, create a macroeconomics of whiplash owing to contradictions between policy today and tomorrow, promote currency wars that undermine the international economy, and foster a political economy that spawns toxic politics. Worst of all, NIRP maintains and encourages the flawed model of growth, based on debt and asset price inflation, which has already done such harm.

Suggested Citation

  • Thomas I. Palley, 2016. "Why ZLB Economics and Negative Interest Rate Policy (NIRP) are wrong," IMK Working Paper 172-2016, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    • Handle: RePEc:imk:wpaper:172-2016
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    File URL: http://www.boeckler.de/pdf/p_imk_wp_172_2016.pdf
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    References listed on IDEAS

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    1. Thomas I. Palley, 2016. "Zero Lower Bound (ZLB) Economics," IMK Working Paper 164-2016, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    2. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
    3. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(3), pages 1469-1513.
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    Cited by:

    1. Chang, Bi-Juan & Hung, Mao-Wei, 2021. "Corporate debt and cash decisions: A nonlinear panel data analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 15-37.
    2. Stefano Di Bucchianico, 2021. "Negative Interest Rate Policy to Fight Secular Stagnation: Unfeasible, Ineffective, Irrelevant, or Inadequate?," Review of Political Economy, Taylor & Francis Journals, vol. 33(4), pages 687-710, October.
    3. Adam, Felix & Matthes, Jürgen, 2018. "Zur Belastbarkeit von Forderungen nach expansiver Fiskalpolitik an der Nullzinsgrenze: Eine Kritik neukeynesianischer Modelle auf Basis einer Literaturanalyse," IW-Reports 7/2018, Institut der deutschen Wirtschaft (IW) / German Economic Institute.
    4. Simona Malovaná & Josef Bajzík & Dominika Ehrenbergerová & Jan Janků, 2023. "A prolonged period of low interest rates in Europe: Unintended consequences," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 526-572, April.

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