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Going negative: The giants of American economics talk interest rates in San Francisco



6 January 2016 10:45

Last year I wrote a piece in the Chongqing international airport after the Chinese Economists Society annual meetings. That was a relatively small affair – I think there were around 400 attendees.

I write this dispatch from San Francisco Airport, where I've been attending the much larger American Economic Association meetings. Fourteen thousand economists converge on one US city every year to discuss elasticities, regressions, and robustness. Yes, it's as awesome as it sounds.

If you missed it, don't panic! Videos of the large panel sessions are up on the website, in which the giants of the profession talk on a given topic of the day. One of the best panel sessions I attended was on the future of the US economy. The participants were the who's who of US economy watchers: Blanchard, Feldstein, Taylor, Stiglitz, and Fischer. Yes, it was an all-male panel, and in fact, of the seven panel sessions I attended, six were all-male. Economics still has a gender problem.

But back to the economics. Each of the panelists addressed different aspects of the US recovery: Blanchard talked about how the Phillips curve is not dead, Feldstein talked about debt, and Stiglitz and Taylor talked about their preferred policies for getting quality growth going again. While Taylor and Stiglitz were sitting next to each other, it is hard to get them further apart on their policy prescriptions.

Stan Fischer, Vice Chair of the US Federal Reserve, talked about central banking, and spent some time on negative interest rates, a subject I've written a bit about before (A Barbarous Relic: Why Can't Interest Rates be Negative?). He noted that the European experience with negative rates has so far been free of troubles, although he suggested things may be different in the US.

First, he noted that money market funds may shut down if interest rates are negative — as rates go negative, he argued, investors may take their money out of the funds. Maybe. It depends on what alternative rates of return are available. And in cases where physical currency loses value, cash would not be a good alternative.

But, in any case, there is likely a limit to the havoc that could be wreaked on money market funds by negative rates. If too many money market funds were to shut up shop, then interest rates on the things money market funds invest in, like commercial paper, would go up. This would present a great opportunity for new money market funds to enter the market.

Fischer also said:

Another concern is whether the complex and interconnected infrastructure supporting securities transactions in the US financial system could readily adapt to a world of negative interest rates. For example, similar to the types of issues addressed ahead of the year 2000, there could well be automated systems that simply are not coded properly at present to process transactions based on instruments with negative rates.

But this is not a law of nature. It can be changed, as Fischer noted: 'All of these are, of course, transitional problems, but they might be sufficient to make a move to negative rates difficult to implement at short notice.' So he is not ruling it out completely. It would be fascinating to know whether the Fed is making discreet enquiries into the financial system to understand these problems.

Photo by Flickr user torbakhopper.

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