Negative nominal interest rates allow a central bank to achieve lower real interest rates, without raising inflation expectations.So, negative nominal interest rates lower inflation expectations. Agreed.
...a negative nominal interest rate gives more policy space to the central bank. It has much the same benefits as raising the inflation target, without the costs associated with higher inflation.As I pointed out here, Narayana is actually a neo-Fisherian; he just hasn't come to terms with it. He understands that, on average, a higher inflation target requires a higher nominal interest rate.
Here’s the wrong way to communicate: keep saying that negative is a purely emergency setting that will be abandoned shortly. The impact of policy depends on the expected path of interest rates over the medium and longer term. The central bank’s communication means that its expanded policy space will have little influence on those medium and longer term expectations. Note that even if the central bank actually keeps rates negative for many years, this ongoing communication will systematically rob the policy of its effectiveness (as well as hurting central bank credibility).Actually, more correctly stated, the impact of policy depends on how the public understands the central bank's policy rule. So, the central bank might want the public to understand that negative nominal interest rates won't happen often (it's an emergency setting, or it depends on very low real interest rates, etc.). That's quite legitimate, and just gives everyone a better understanding of what the central bank is up to.
Here’s the right way to communicate: keep saying that all available tools, including negative interest rates, will be used as is needed to return employment and inflation to desirable levels as rapidly as possible.That's the crux of the problem. Negative interest rates will in fact not lead to a return of employment and inflation to desirable levels in a rapid fashion, under some conditions. As I pointed out in my last post, the Swedish Riksbank, the central bank of Denmark, the Swiss National Bank, and the ECB, have all gone negative, and they have not been returning inflation rapidly to their 2% targets - in same cases they are getting further away, and it's not hard to see why.