The mixed results from experiments with negative interest rate policy in Europe and Japan have led many to conclude that the idea is ill begotten and should be abandoned. To do so would be a serious mistake.

The negative rate policies that are in place certainly have significant limits and it is not clear how much more can be done in the short term. However, policy could be made far more effective in the long run, once a host of institutional constraints are dealt with. The thorniest problem is avoiding a run into zero-interest cash if interest rates become too negative but even this is far from an insurmountable obstacle, given time.

In what could turn out to be a protracted era of low “normal” interest rates, the benefits of clearing the way for effective negative rate policy are potentially significant. If central banks had been able to adopt such policies at the height of the financial crisis, for example, it is likely this would have helped stem the fall in employment, output and asset prices.