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Limits of monetary policy

There are limits on how much monetary policy can support the economy. We need broad-spectrum policies as well
May 28, 2020

What can monetary policy do? This is the question posed by reports that the Bank of England is considering negative interest rates as a response to fears of a slow post-lockdown recovery.

It’s not obvious that negative rates would work. In charging banks on the deposits they make at the Bank of England they are, in effect, a tax. And taxes rarely stimulate economic activity. For this reason, Sweden last year stopped its experiment with negative rates.

This does not, however, mean that monetary policy is impotent. M&G’s Eric Lonergan says a different version of negative rates could work – if the Bank lent to commercial banks at negative rates, conditional upon them lending the money on to companies and households at low or negative rates. More powerfully still, the Bank could simply write all of us a cheque or an interest-free loan.

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