A nice catch at FT Alphaville:
There’s a good note from Goldman Sachs this week on the implications of negative rates at the ECB.
But given that many of the points echo much of the discussion already featured on FT Alphaville for years, we’ll cut straight to the interesting bits.
Goldman agree there isn’t anything conceptually special about
negative rates because bond math works with negative numbers (as it’s
focused on real returns). However, they add, there is a specific reason
why negative rates might have qualitatively different macroeconomic
implications, unless controls on cash were put in place with them:
…the possibility for banks to arbitrage against negative
rates by holding banknotes. If banks are to be charged for holding
excess liquidity (as the imposition of a negative DF rate would imply),
they have an incentive to hold banknotes to avoid that charge. This
implies that a negative DF rate would prove ineffective (as banks
switch excess liquidity into banknotes): arbitrage implies that market
rates are bounded at zero.
Zero lower bound. Behind this so-called ’zero lower bound’ on nominal
interest rates lie two assumptions: (1) the cost of holding banknotes
is negligible; and (2) banknotes are supplied elastically by the
monetary authorities. In principle, the central bank could impose a tax
on banknote holdings (e.g., by cancelling a portion of banknotes on the
basis of (a random draw over) their serial numbers)....MUCH MORE
