Last April, during what appeared to be a U.S. economic free fall, Greg Mankiw wrote an op-ed in the New York Times advocating some unconventional strategies for trying to achieve a negative nominal interest rate. The point of trying to institute a negative interest rate would be to stimulate demand by discouraging savings and promoting consumption. However, other economists such as Robert P. Murphy at the free-market advocate Ludvig von Mises Institute harshly criticized Mankiw’s logic. Mankiw later noted that Fed research showed that the policy rate should have been set to approximately -5% if something close to the Taylor Rule were followed. Other economists such as LSE’s William Buiter advocated some similar strategies to those recommended by Mankiw. There have also been several cases where currencies have been devalued in nominal terms, such as was suggested by Mankiw in his NY Times piece. The Swedish Riksbank has also employed similar strategies to support increased lending.
Questions you might try to answer:
- Do you believe that a negative nominal interest rate would be a useful strategy in the United States? How do you think this might have been instituted, and do you think it would have had the desired effect?
- How do you compare the Fed’s quantitative easing measures to those suggested by Mankiw, Buiter, or Murphy? Have they achieved their goals?
- When contemplating the exit strategy of the central bank after all of this easing, which strategy do you believe the Fed would be able to exit most easily?