Negative Interest Rate Era: A Convenient Way To Arbitrage Speculative Capital.

Negative interest rates are not unlimited. It is estimated that the lower limit of negative interest rates is between -0.5% and -2%. That is to say, the fluctuation of interest rate in the interest rate of BP will not be particularly significant for the real economy. On the contrary, it will encourage opportunistic speculative capital to carry out arbitrage transactions internationally.

　　 1. Negative interest rate Background of policy launch

The background of the negative interest rate policy is the international financial crisis in 2008. Although the current financial crisis broke out nearly 8 years ago, the global economy is still in a slow recovery. There are many reasons for the outbreak of the financial crisis. The imperfection of the international monetary system is one of the most important factors. After the decoupling of US dollars from gold in 1971, the world has entered the era of full credit money, and its liquidity has increased rapidly. With the progress of financial integration, cross-border capital flows are becoming more frequent and volatile. In fact, the increasing global liquidity has brought great challenges to financial stability and the sustained development of the macro-economy. Under the imperfections of the international monetary system, monetary factors and non monetary factors are intertwined, and global imbalances continue to accumulate, leading to the outbreak of the international financial crisis.

After the outbreak of the crisis, many countries have issued emergency measures urgently. Because fiscal policy It will be constrained by the "rigid" constraint of the government's existing debt level and deficit rate, which has not been further developed in some countries. Structural policies are often effective in the medium and long term, and the process is rather painful. In contrast, monetary policy with strong flexibility, less political resistance and quick results has become the first choice for all countries to deal with the crisis. Although central banks quickly made many timely and appropriate responses after the outbreak of the crisis and effectively alleviated the crisis, some countries appeared to be overly dependent on monetary policy in the post crisis era. Loose monetary policy has been stepped up, from interest rate cuts, central bank asset purchases to currency devaluation and negative interest rate policies, while other policies have not followed up in time.

The money created in the past for economic prosperity was not eliminated without the advent of the crisis. The extremely loose monetary policy after the crisis quickly created more global liquidity. Originally, the collapse of banks in the financial crisis is an adjustment way to eliminate excess money, that is to say, in order to realize the clearing of the real economy in the way of currency clearing. But too loose monetary policy after the crisis has not only cleared the currency, but has greatly increased global liquidity. In fact, too much liquidity can easily cause asset price inflation to intensify. Cross border funds The volatility has even caused too much panic, affecting global financial stability and the recovery of the real economy.

2, the mechanism of negative interest rate policy.

At this stage, the negative interest rate policy has been mainly directed at interest rates between the central bank and commercial banks, such as commercial banks' interest rates in the central bank and Excess Reserve interest rates. The original intention of the negative interest rate policy is that in a smooth interest rate transmission mechanism, first, the negative interest rate between the central bank and commercial banks can be transmitted to the overnight interest rate of the interbank market; next, the inter-bank market overnight interest rate plus the time premium will lead to the interest rate of the medium and long-term treasury bonds; finally, the interest rate of the medium and long-term treasury bonds plus the risk premium will lead to the medium and long-term loan interest rates, which will ultimately play a role in the real economy. For a long time, monetary policy has been constrained by the "zero interest rate lower limit", while the negative interest rate has broken through the boundary, which means that the policy interest rate at the beginning of the interest rate transmission mechanism has been transferred to a negative or lower level, thus trying to suppress the entire yield curve.

Theoretically, the negative interest rate policy can affect economic activities through five specific channels: first, the credit channel. The negative interest rate of commercial banks in the central bank's deposit is equivalent to that of commercial banks in the central bank's deposit, which encourages commercial banks to lend more capital. The two is asset price channel. Negative interest rate can raise asset prices by reducing discount rate, and stimulate consumption demand or Tobin Q effect through wealth effect to promote investment demand. The three is asset portfolio channel. Negative interest rates will enhance risk preference and encourage the public to allocate more risky assets in the financial market or the real economy. The four is the re inflation channel. Negative interest rate policy can create inflation expectations and resist deflation risk. The five is the exchange rate channel. By reducing the yield of local currencies and guiding the devaluation of currencies, we can promote imports and exports.

3, the negative role of negative interest rate policy.

Personally, I believe that the negative interest rate policy is not as good as the proponents envisaged, and has obvious negative effects.

One is the deprivation of money holders. After the central bank carries negative interest rates on the deposit reserve of commercial banks, commercial banks may transfer the cost to depositors and charge negative interest rates to depositors. In fact, some commercial banks have implemented negative interest rates on some institutional clients. This directly eroded the wealth of depositors and hurt the interests of interest income groups. The reduction of wealth may lead to a decline in consumer demand, but it will offset the original intention of the negative interest rate policy to expand aggregate demand. In fact, some scholars have pointed out that QE or QQE have widened the income gap, because the continued loose monetary policy promotes the rise of risky financial assets, making the rich who hold stocks and mutual funds benefit from it, while the poor can only get very little interest income, thus aggravating the income inequality.

The two is to damage the balance sheet of commercial banks. If commercial banks choose to transfer negative interest rates to depositors, they will face the risk of losing deposit customers. In reality, some commercial banks have refused to deposit requests from some institutional depositors because they have to pay a negative deposit reserve rate. If commercial banks can not transfer negative interest rates to depositors, then we need to adjust the structure and duration of assets to digest.

Because the interest paid to the central bank should be overwritten, commercial banks may raise the interest rate to pass on the cost, and it is also possible to allocate high-risk assets to compensate the eroded profits and increase the arbitrage of investment capital, which is not conducive to financial stability. Even if the central bank hopes, after the "negative pressure" is forced, the commercial banks will lend money to the central bank's funds. This part of the new loans may lend at higher loan interest rates to the enterprises that the original commercial banks did not give credit, resulting in a rise in interest rates. After the financial crisis, the economic outlook is low, the return on capital is very low, the demand for corporate credit is not strong, the willingness and ability of commercial banks to borrow are weak, and it is not easy to say how much money that can be moved from the central bank account can contribute to the expansion of credit scale.

Three, it is not conducive to deposit creation and financing of the real economy. If negative interest rates are imposed on Residents' deposits, residents will hold large amounts of cash, resulting in a decline in the monetary multiplier, which may theoretically drop to zero. Before the crisis, financial institutions are the main body of deposit creation or credit creation. After the implementation of QE or QQE, the central bank will directly replace commercial banks to create money, instead of commercial banks, which should be done by commercial banks. The emergence of negative interest rates will further weaken the deposit creation function of commercial banks.

Four, negative interest rates do not have no boundaries. Negative interest rate is not unlimited, because the public can choose to hold cash to resist negative interest rates, and the cost of holding cash, trading and insurance is the lower limit of negative interest rate policy. It is estimated that the lower limit of negative interest rates is between -0.5% and -2%. That is to say, the fluctuation of interest rate in the interest rate of BP will not be particularly significant for the real economy. On the contrary, it will encourage opportunistic speculative capital to carry out arbitrage transactions internationally.

The five is to switch trading rules and valuation systems, which may cause additional costs in financial transactions. Negative interest rates have switched the "coordinate system" of financial transactions. Financial institutions need to change their trading habits, reconstruct the corresponding models of negative interest rates, and adjust the valuation system of financial products. At the operational level, the original part of the trading system only set a lower interest rate limit, because the emergence of negative interest rates need to reset parameters, modify the transaction code, and so on, to increase the cost of financial transactions. At the legal level, the negative interest rate makes the quality of bonds as collateral decreases, which easily leads to default risks, resulting in legal friction.

4, basic conclusions and policy recommendations

Since the current financial crisis, loose monetary policy has been increasing at various levels, but its marginal effect on economic recovery is weakening. Nevertheless, some central banks have begun to try negative interest rate policy. In fact, we should not hold too much expectation of the negative interest rate. Negative interest rates will even have many negative effects. Under such circumstances, I personally believe that efforts can be made from the following aspects:

One is to reduce excessive dependence on monetary policy, and monetary policy is not enough to rely entirely on it. In the post crisis era, the marginal effect of loose monetary policy on economic recovery is weakening, and the potential side effects are unclear. Although loose monetary policy can win time for structural reform, it can not be dominated by it, and it relies too much on it. It is easy to ignore the necessity and urgency of other reforms. If we do not make great efforts in reform, instead of staring at the central bank all day and looking at what policies the central banks should adopt, the world economy is hopeless.

Two, we must promote structural reforms in depth. There are different space for fiscal policy in different countries, and more efforts should be made to increase the intensity of supply side structural reform so as to solve the problem of supply and demand balance in the real economy. Structural rigidities and market imperfections will reduce the effectiveness of demand side policies and the efficiency of resource allocation. Implementing credible structural reforms can build confidence in the short term and improve economic resilience in the long run.

Three, we should constantly improve the international monetary system. This crisis is the total outbreak of global imbalances accumulated over the past decades, and many deficiencies in the current international monetary system may be one of the causes of global imbalances. Unfortunately, this global imbalance has not yet been fundamentally resolved. The major countries lack the courage and motivation to reform the situation. The theoretical circles have not reached a clear consensus on the future arrangement of the international monetary system.

But it is certain that the future arrangement of the international monetary system must be based on the overall interests of the whole world, and urge some reserve currencies to perform the functions of the global reserve currency in the institutional framework. The loss of physical gold in global currency issuance is one of the institutional causes of global liquidity after the crisis. In the future international monetary system design, an international monetary anchor is needed. This is a challenge to the theory and practice of international finance. Only in this way can the unlimited amplification of credit be restrained, and it will also be beneficial to solving global imbalances, maintaining financial market stability and improving the efficiency of financial supervision.