Enabling Deep Negative Rates to Fight Recessions : A Guide

The experience of the Great Recession and its aftermath revealed that a lower bound on interestrates can be a serious obstacle for fighting recessions. However, the zero lower bound is not a law of nature;it is a policy choice. The central message of this paper is that with readily available tools a central bank canenable deep negative rates whenever needed-thus maintaining the power of monetary policy in the futureto end recessions within a short time. This paper demonstrates that a subset of these tools can have a bigeffect in enabling deep negative rates with administratively small actions on the part of the central bank. Tothat end, we (i) survey approaches to enable deep negative rates discussed in the literature and present newapproaches; (ii) establish how a subset of these approaches allows enabling negative rates while remainingat a minimum distance from the current paper currency policy and minimizing the political costs; (iii) discusswhy standard transmission mechanisms from interest rates to aggregate demand are likely to remainunchanged in deep negative rate territory; and (iv) present communication tools that central banks can useboth now and in the event to facilitate broader political acceptance of negative interest rate policy at theonset of the next serious recession