holdings would ultimately be reflected in reduced seigniorage payments to the treasury. Central banks naturally see this outcome as a political risk to their independence and institutional reputations which, all else equal, may make them more hesitant to use QE. However, political risk to the central bank is not equivalent to a loss in social welfare. From the perspective of society as a whole, the fiscal risks of qe have to be balanced against the substantial benefits of a tool that gives monetary policymakers additional scope to respond to a serious economic downturn or to unwanted disinflation Moreover, the fiscal risks of QE are not one-sided. QE programs can be quite profitable for the central bank and the Treasury, because on average the yields on the longer-term assets the central bank acquires are higher than those on its short-term liabilities, and because declining yields create capital gains on the central bank's existing bond holdings. Since 2009, the Federal Reserve has remitted more than $650 billion in profits to the U.s. Treasury(Federal reserve 2017), a much higher rate of remittances than usual before the crisis. On the other hand, if fiscal losses do occur as the result of a QE program, it will likely be because the economy recovered more quickly and strongly than expected, resulting in higher interest rates; since losses are most likely to occur at times when the economy is unexpectedly strong, they are hedged from a social perspective. Finally, and importantly, the beneficial fiscal effects of an effective Qe program go well beyond seigniorage, as the government's budget also benefits from low borrowing rates avoidance of deflation or very low inflation, and the higher revenues that result from increased economic activity All that said, the fiscal argument seems to me to be more balanced than some of the other criticisms of QE. There are difficult governance issues and competing values in play here, and people could reasonably come to different conclusions. One approach, similar to that taken by the United Kingdom, is for the central bank to consult with the Treasury on Qe plans. I dont advocate that approach because of the implied reduction in central bank independence, but I appreciate that it may reduce the political risks associated with the use of Qe Negative interest rates and yield curve control i will comment briefly on two monetary tools in use outside the United States, but which I don' t expect to be used by the Fed in the foreseeable future: negative(nominal)interest rates and pegging longer-term interest rates(so-called yield curve control)
15 holdings would ultimately be reflected in reduced seigniorage payments to the treasury. Central banks naturally see this outcome as a political risk to their independence and institutional reputations which, all else equal, may make them more hesitant to use QE. However, political risk to the central bank is not equivalent to a loss in social welfare. From the perspective of society as a whole, the fiscal risks of QE have to be balanced against the substantial benefits of a tool that gives monetary policymakers additional scope to respond to a serious economic downturn or to unwanted disinflation. Moreover, the fiscal risks of QE are not one-sided. QE programs can be quite profitable for the central bank and the Treasury, because on average the yields on the longer-term assets the central bank acquires are higher than those on its short-term liabilities, and because declining yields create capital gains on the central bank’s existing bond holdings. Since 2009, the Federal Reserve has remitted more than $650 billion in profits to the U.S. Treasury (Federal Reserve, 2017), a much higher rate of remittances than usual before the crisis. On the other hand, if fiscal losses do occur as the result of a QE program, it will likely be because the economy recovered more quickly and strongly than expected, resulting in higher interest rates; since losses are most likely to occur at times when the economy is unexpectedly strong, they are hedged, from a social perspective. Finally, and importantly, the beneficial fiscal effects of an effective QE program go well beyond seigniorage, as the government’s budget also benefits from low borrowing rates, avoidance of deflation or very low inflation, and the higher revenues that result from increased economic activity. All that said, the fiscal argument seems to me to be more balanced than some of the other criticisms of QE. There are difficult governance issues and competing values in play here, and people could reasonably come to different conclusions. One approach, similar to that taken by the United Kingdom, is for the central bank to consult with the Treasury on QE plans. I don’t advocate that approach because of the implied reduction in central bank independence, but I appreciate that it may reduce the political risks associated with the use of QE. Negative interest rates and yield curve control I will comment briefly on two monetary tools in use outside the United States, but which I don’t expect to be used by the Fed in the foreseeable future: negative (nominal) interest rates and pegging longer-term interest rates (so-called yield curve control)
Negative interest rates have been recently employed in Japan and a number of European countries(Bernanke, 2016a). To enforce negative rates, central banks generally charge a fee or the reserve holdings of commercial banks. Arbitrage ensures that the negative return to reserves translates into negative returns to other short-term liquid assets. Negative short rates need not imply negative rates on longer-term assets, particularly those that are less liquid or involve credit risk. Rather, negative short-term rates give the central bank a new tool for bringing down the longer-term rates, like mortgage rates, that matter most for economic activity. The evidence suggests that negative rates have helped to ease overall financial conditions in the countries in which they have been used, thereby promoting economic recovery ( dell'Ariccia et al, 2017) For economists, used to thinking about negative real interest rates, moderately negative nominal rates are not a big deal. There is very little practical difference between a 0. 1 percent return and a return of negative 0. 1 percent, for example. However, many non-economists find the idea of negative nominal disorienting, a reaction that has contributed to political resistance and on the margin has probably made central bankers more hesitant to use this tool Putting aside the politics, and excluding limitations on the use of currency(Rogoff, 2016)as beyond the scope of this note, negative interest rates appear to provide relatively modest benefits and have modest costs. So while the tool may well be appropriate and useful in some contexts, it does not merit the overheated public attention it has received Under current institutional arrangements, the potential benefit of negative rates are relatively modest because attempts to push rates too far below zero will induce substitution into cash. The most negative rate yet imposed is minus 75 basis points, by Denmark(Danmarks 2015). To date, negative rates have so far not triggered much movement into cash, as best as we can tell, but it is likely that more such adjustment would occur if rates were to go much further below zero, or if negative-rate policies were perceived to be recurring or persistent The costs of negative rates mostly arise from their interaction with certain institutional features of financial markets. For example, in the United States, money market mutual funds (MMMFS) generally guarantee a nominal return of no less than zero, and failure to meet that standard(called"breaking the buck" )led to a run on MMMFs in 2008, after the Lehman failure Concerns about possible destabilization of MMMFs were an important reason that the Fed did not employ negative rates during the post-crisis period (Burke et al., 2010). Reforms undertaken since the crisis have reduced this risk, by forcing many money market funds that invest in private
16 Negative interest rates have been recently employed in Japan and a number of European countries (Bernanke, 2016a). To enforce negative rates, central banks generally charge a fee on the reserve holdings of commercial banks. Arbitrage ensures that the negative return to reserves translates into negative returns to other short-term liquid assets. Negative short rates need not imply negative rates on longer-term assets, particularly those that are less liquid or involve credit risk. Rather, negative short-term rates give the central bank a new tool for bringing down the longer-term rates, like mortgage rates, that matter most for economic activity. The evidence suggests that negative rates have helped to ease overall financial conditions in the countries in which they have been used, thereby promoting economic recovery (Dell'Ariccia et al, 2017). For economists, used to thinking about negative real interest rates, moderately negative nominal rates are not a big deal. There is very little practical difference between a 0.1 percent return and a return of negative 0.1 percent, for example. However, many non-economists find the idea of negative nominal rates disorienting, a reaction that has contributed to political resistance and on the margin has probably made central bankers more hesitant to use this tool. Putting aside the politics, and excluding limitations on the use of currency (Rogoff, 2016) as beyond the scope of this note, negative interest rates appear to provide relatively modest benefits and have modest costs. So while the tool may well be appropriate and useful in some contexts, it does not merit the overheated public attention it has received. Under current institutional arrangements, the potential benefit of negative rates are relatively modest because attempts to push rates too far below zero will induce substitution into cash. The most negative rate yet imposed is minus 75 basis points, by Denmark (Danmarks, 2015). To date, negative rates have so far not triggered much movement into cash, as best as we can tell, but it is likely that more such adjustment would occur if rates were to go much further below zero, or if negative-rate policies were perceived to be recurring or persistent. The costs of negative rates mostly arise from their interaction with certain institutional features of financial markets. For example, in the United States, money market mutual funds (MMMFs) generally guarantee a nominal return of no less than zero, and failure to meet that standard (called “breaking the buck”) led to a run on MMMFs in 2008, after the Lehman failure. Concerns about possible destabilization of MMMFs were an important reason that the Fed did not employ negative rates during the post-crisis period (Burke et al., 2010). Reforms undertaken since the crisis have reduced this risk, by forcing many money market funds that invest in private