BIS Study Concludes Cutting Interest Rates to Zero May Not Be Necessary

A BIS study on the Effective Lower Bound of Interest rates suggests central banks can do other things than slash rates.

Have central banks gone too far in with rate cuts? I think so, and a BIS study No 804 (Un)conventional Policy and the Effective Lower Bound concludes the same thing.

The 47-page study is for geeks and it is mostly unintelligible gibberish that I will mock. A few small sections of the report are mostly understandable. Here are a couple such snips.

In response to the Financial and economic crisis of 2008-09, central banks have aggressively cut monetary policy rates, in many cases all the way to the effective lower bound (henceforth ELB), namely the rate below which it becomes profitable for Financial institutions to exchange central bank reserves for cash.

Our main result is that in reaction to a Financial shock which reduces banks' monitoring efficiency, credit policy may be a more efficient tool than policy interest rates.

Cutting policy rates to zero may be unnecessary after non-standard measures have been implemented.

The report was mostly 47 pages of nonsense that looked like the following:

BIS Study 804 Snip 1

BIS Study 804 Snip 2

BIS Study 804 Snip 3

The study had 20 references to the word "assume".

Note the preceding snip to "simply" the solution via a simple "approximation".

The study is rife with gibberish about things like "output gaps" that cannot be accurately calculated even if they exist at all.

In the first snip above, the study mentions "entrepreneurs would postpone consumption until the time of death."

This is another way of saying time preference cannot logically be negative.


Despite all the gibberish and mathematical nonsense, the final conclusion is at least somewhat understandable "Cutting policy rates to zero may be unnecessary after non-standard measures have been implemented".

I would revise and expand the sentence as follows.

Cutting rates to zero can never be correct. It is against laws of finance and time preference, which can never be negative. But there should not be a Fed in the first place either to cut rates or to implement "non-standard" measures.

Brick Wall

Central banks are the problem, not the solution.

They have hit a brick wall and cannot cram any more debt into the system.

There is no tolerance for paying interest.

The evidence is overwhelming.

  1. More Currency Wars: Swiss Central Bank Poised to Cut Interest Rate to -1.0%
  2. Inverted Negative Yields in Germany and Negative Rate Mortgages.
  3. Fed Trapped in a Rate-Cutting Box: It's the Debt Stupid

Mike "Mish" Shedlock

Comments (22)
No. 1-11

Does anyone expect CBs to back off now? Once through zero what event in the real world puts a hard limit on how negative they can go?

What will stop them?

Meanwhile Lagarde heads to ECB just as one of her darling children, Argentina, teeters on default again. She left some wreckage with poor interventions in Greece, siding with the Eurozone, and Argentina. She thinks neg rates are ok, along with Greenspan.

Beyond me to understand what on earth they think they are accomplishing outside of building upto an even bigger negative consequence.


It's the " May Not Be" that suggests even BIS (the authority) really has no clue too.


I don't believe Q.E. (other than the first round) had any economic impact other than reinflating asset prices and letting banks pretend they were solvent.


I can't get enough of those formulas that make economists look like scientists, something like eh...chemistry, which I studied. It made me feel good that, e.g. molecules behave predictably, and according some formulas. Thus, my conclusion is that the financial disaster in which we live can be attributed to lack of economic formulas. Make more complex formulas fellas, and raise those rates now.


the CBs of the world are wall papering over much needed structural changes in moribund economies. they are treating the symptoms with diminishing results .