Negative Interest Rates And The Carry Trade
Tyler Cowen asked yesterday if the stimulative impact of hypothetical negative nominal interest rates wouldn’t just be undermined by people shifting into a different currency. My first response was that such a move would reduce the value of the currency in question, thus expanding demand through the net exports channel. But my second and better response is that whatever problems may or may not exist in this domain have nothing in particular to do with negative nominal interest rates.
Even in a zero lower bound world, interest rate differentials exist and therefore the carry trade happens. To what extent this is a problem for monetary policy is an interesting issue. My understanding of the evidence is that capital controls help a country maintain monetary policy autonomy which to me is a pretty strong argument for capital controls. But either way, there’s no special issue of negative nominal rates here, and it still seems to me to be the case that moving to an all-digital currency adds an important stabilization tool.