Ask HN: What would a market interest rate be, in the absence of monetary policy? | Hacker News Reader

Ask HN: What would a market interest rate be, in the absence of monetary policy?

3 pointsyasp2 comments

Via mechanisms such as paying interest on reserves and quantitative easing, central banks effect monetary policy by setting interest rates, both short-term and long-term. In Europe, we see the unusual situation of negative interest rates. Meanwhile, in the US, Alan Greenspan is signaling that investors should expect negative rates in due course. Given that central banks set interest rates as a matter of monetary policy, it begs the question of what these rates would be were they not to do so. Have any economists attempted to answer this question? I am ignorant enough of central banking (and banking in general) not to know how to research the matter further.

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The central banks can't force anyone to deposit money in negative-interest-bearing accounts, except for relatively small reserve balances that banks can't/won't hold in cash or other short term liquid assets. Without the central banks, those daily reserve deposits would have to be held in cash, which would have a higher cost/risk than the central bank, as evidenced by banks keeping their deposits in negative-interest-rate accounts. They wouldn't do it if they had a better option. If banks were not even required to hold a fraction of their liabilities in reserve then bank runs would probably be far more common, but interest rates might be slightly higher between the busts.

That entities are choosing to accept negative rates is certainly true (at least until paper currency is phased out, then it perhaps would be more debatable), but as far as I can tell, this is a nonsequitur. European banks are offering negative rates to savers because they are mandated to maintain reserves with the ECB, and the ECB is offering negative rates on reserves. The rate on reserves in turn drives the rate of inter-bank lending. So, it seems reasonable to me to ask what the market rate would be were the central bank not offering any interest on reserves, nor trying to set the rate of inter-bank lending, nor any similar rate. Would the market rate be negative, or zero, or slightly positive, or substantially positive? Have any economists taken a stab at the question? If not, why not?

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