Stephen Poloz needs to be honest with Canadians about negative interest rates

To soften the blow of the COVID-19 pandemic, the Bank of Canada is running what it sees as an expansionary, or loose, monetary policy. I think an expansionary policy makes a lot of sense.

The problem is this. The Bank of Canada has several tools it can use to loosen. Some are better than others. But it has stopped trying to use its best tool.

What is its best tool? Well, there are three ways that the Bank of Canada can loosen monetary policy.

Say interest rates are at 4%. Stephen Poloz, the Governor of the Bank of Canada, can either...

1) Cut the interest rate, say to 3.75%
2) Keep rates at 4% but do $20 billion or so in quantitative easing. This is just a fancy term for buying up assets like government bonds.
3) Keep rates at 4%, but promise to maintain them at 4% for extra-long. This is known as forward guidance.

Let me explain the third, forward guidance, because it's complicated. Basically, Poloz says that he will keep the Bank of Canada's interest rate at 4%, but promises to maintain it at that level for longer than would otherwise be warranted. The intuition here is that by committing to keep interest rates extra loose in the future, he can loosen monetary policy now.

I like to think about forward guidance in terms of raising children. Say that I want to modify the behaviour of my three-year old kid. To do so I might reward him with an M&M. Unfortunately I don't have any M&Ms on me. So I promise to give him an extra M&M after the next trip to the grocery store. Hopefully this "guidance" about future M&Ms is enough to get him to do what I want, now.  

So which of these three is the Bank of Canada's best tool?

The Bank of Canada's actual behaviour over the last few decades hints at what tool it considers to be the most useful. In 99% of the cases, it has chosen to loosen policy by dropping interest rates, not by embarking on quantitative easing or forward guidance. It usually does so in 0.25% increments, but when the economic shock is large, it'll resort to large interest rate cuts. For instance, after 9/11 it chose a 0.5% reduction.

What about the current episode? The Bank of Canada describes the coronavirus fallout as "unprecedented". In its recent monthly monetary policy report, the Bank says that the severity of the current shocks has inspired it to roll out a "bold policy response."

But if the Bank's policy response is so bold, why has it stopped using its favorite monetary policy tool? Having reduced interest rates to 0.25%, the Bank of Canada says it won't drop them anymore. According to Poloz, interest rates now sit at Canada's "effective lower bound." The implication of his  phrasing is that not even a force of nature could move rates below 0.25%.

But that's simply not true. The Bank of Canada's favorite tool isn't stuck at a lower bound. It would be pretty easy to implement another four interest rate cuts. This would take the Bank of Canada's interest rate from 0.25% to 0%, then to -0.25%, -0.5%, and -0.75%.

Don't take it from me. In this 2015 Bank of Canada working paper, researchers Jonathan Witmer and Jing Yang estimate that the Canadian effective lower bound is likely between -0.25% and -0.75%, with a midpoint estimate of -0.5%. Canada would hardly be unique if it went into negative interest rate territory. Other countries have tried negative rates, including Switzerland, Sweden, Denmark, and the European Union. 

There's a good chance we'll need it. If we look at previous recessions, we generally got about 4% in interest rate cuts. During the 2001 tech meltdown, the Bank cut from 5.75% to 2%. In 2008 it went from 4.5% to 0.25%. But in our current recession, we've gone from 1.75% to 0.25%. So all the Bank of Canada wants to give us in 2020 is a paltry 1.5%. What a gyp.

What about the Bank's other options for easing? In the last week of March, the Bank of Canada announced a quantitative easing program of $5 billion per week. But by the Bank of Canada's own demonstrated preferences, quantitative easing can't be a great tool—in previous easing periods, the Bank of Canada didn't bother with it.

The problem is that quantitative easing doesn't do much. It sounds big and hefty. But in actuality, big purchases of government bonds are a bit like trying to move a jet plane with a fan. They're certainly no substitute for another rate cut.

As for forward guidance, the Bank of Canada hasn't announced it yet. But any parent knows that a promise of future M&Ms just isn't good as M&Ms in the present. Kids are skeptical of promises, and for good reason.

Stephen Poloz has described negative rates as "not sensible". Here's what is not sensible. We are currently in the midst of the fastest slowdowns in Canadian history, and the Bank of Canada staidly refuses to even consider the possibility of using its favorite and most effective instrument; interest rate cuts. I'm not saying that another rate cut is warranted. But Poloz should at least unshackle his best tool.

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P.S. I've been down this rabbit-hole before.

In that post, I speculate why Canadian policy makers seem loath to consider further rate cuts into negative territory.

Look, Canadian regulators have always had a close working relationship with the big banks. This certainly had its benefits. But here we are seeing one of its drawbacks. Canada's big banks are conservative and afraid of change. They probably don't want to incur the frictional costs associated with transitioning to a negative rate environment. And they have probably voiced their concerns to the Bank of Canada. And so the Bank is supporting the banks by declaring the effective lower bound to be at 0.25%. This decision comes at the expense of all Canadian citizens. We all benefit from the ongoing usage of the Bank of Canada's strongest tool: variations in the rate of interest. QE and forward guidance are poor fill-ins.

P.P.S. I just stumbled on Luke Kawa's series of tweets from a few weeks back on the topic of the Bank of Canada's effective lower bound. He captures my thoughts too.

Imagine if the Fed came out of nowhere and dropped a bombshell that it lost 75 basis points of policy space without even acknowledging it.

— Luke Kawa (@LJKawa) March 27, 2020

How many bullets does the Bank of Canada have left in its chamber?

It's been a while since I blogged about Canadian monetary policy, but Luke Kawa's recent tweet on the topic of Canada's effective lower bound got me thinking.

BoC has referred to 0.25% as its "effective lower bound" -- Shenfeld suggested that any lower, BoC thinks there'll be problems in money mkts

— Luke Kawa (@LJKawa) August 4, 2015

Luke is referring here to CIBC chief economist Avery Shenfeld's recent missive on how the Bank of Canada might react if the Canadian economy's losing streak were to continue. According to Shenfeld, the Bank of Canada has one final quarter point cut left in its quiver—from 0.5% to 0.25%. Should the bleeding continue, Governor Stephen Poloz can then turn to forward guidance and only when that has been exhausted will quantitative easing become a possibility.

Really? The Bank of Canada can't go below 0.25%? Has Shenfeld not been following what has been occurring outside Canada's borders over the last twelve months? Sweden's central bank, the Riksbank, has cut its repo rate to -0.35% while the European Central Bank has ratcheted its deposit rate down to -0.2%. The Swiss National Bank is targeting an overnight interest rate of -0.75%, down from 0% the prior year, at the same time that the Danmarks Nationalbank currently maintains a certificate of deposit rate of -0.75%. I've been covering this stuff pretty exhaustively here, here, here, here, and here.

After digging a bit further, I was surprised to find that the sort of interest rate emasculation implied in Shenfeld's piece is endemic here in Canada. David Rosenberg of Gluskin Sheff, for instance, recently said that Poloz has "just one bullet left in the chamber" while the FP's John Schmuel wonders what will happen if the Bank of Canada is forced to use its "last remaining lifeline and cut its rate to zero." The Bank of Canada is also a transgressor in spreading the meme: on its FAQ, the Bank says that the overnight rate's lowest possible level—its effective lower bound—is 0.25%.

One reason the faux 0.25% lower bound continues to circulate in the public discourse is the somewhat lazy reliance commentators have on the Bank of Canada's credit crisis playbook as a model for how low rates can go. In addition to implementing forward guidance during the crisis, the Bank reduced the overnight rate to 0.25% by flooding the system with excess balances. But this playbook has gone stale. As I've already pointed out, a number of European central banks have demonstrated the possibility of going below zero. A Bank of Canada deposit rate cut to as deep as, say, -0.50%, combined with an overnight target of -0.25, effectively buys Poloz three more 25 basis point interest rate cuts, not just one.

Ask folks why Canadian markets can't bear negative interest rates and there's typically a lot of arm-waving and mumbling about money markets. Case in point is Shenfeld on the +0.25% level: "In the Canadian money market structure that’s as low as she gets, and effectively represents the zero lower bound for monetary policy." I'm not aware of a single Canadian fixed income product that can't bear slightly negative interest rates. Would maple syrup commercial paper markets come to a standstill if the Bank of Canada cut rates to -0.25%? Would the market for Gordie Howe bonds collapse? While no doubt a nuisance, the transition to negative rates has been managed by money markets in Denmark, Sweden, Switzerland, and the rest of Europe without major mishap. There's simply no justification for Canadian exceptionalism.

While slightly negative rates won't cause structural problems in money markets, deeply negative rates would certainly be problematic. Send rates low enough and bank runs will begin as people cash in their negative-yielding money market instruments for paper dollars. At some point the banking system would cease to exist. But this doesn't occur at Shenfeld's so-called 0.25% lower bound, nor at -0.75%. Thanks to the carrying costs of bulky banknotes, it probably only starts to be a problem somewhere between -1.0% to -3.0%. The existence of a wide safe zone before hitting those levels gives the Bank of Canada a lot more lifelines than just one.

The last reason for the circulation of a false lower bound in Canadian monetary policy discussion is vested interests. I doubt that Canada's big banks are fond of incurring the frictional costs associated with transitioning to a negative rate world. Better to "wipe out" that possibility from the Overton Window and push something less-threatening like forward guidance.

Let me be clear that I have no specific insight into whether the Bank of Canada should be loosening or not. What is important is that the Bank has flexibility to the downside should it decide that easing be necessary. Breathing space is important because pound-for-pound, actual interest rate cuts are always better than unconventional policies like forward guidance—the promise to keep interest rates too low in the future—or quantitative easing. A move to -0.15% or -0.25%, should it be necessary, represents a continuation of the Bank of Canada's decades' long method of implementing conventional monetary policy via direct interest rate adjustments. It's not fancy, but it has been in place for a long time and everyone pretty much gets it by now. Central bank guidance, on the other hand, is complicated and suffers from the fact that the public can never be sure that a three-year promise initiated by a Conservative-appointed governor will stay in place should an NDP-appointed governor take his place. As for quantitative easing, it doesn't even work in theory, as pointed out by none other than Ben Bernanke. (Or see how New Zealand's cashing up the system had no influence on prices)

Incidentally, if Canada were to suffer a broader shock than the current one and the Bank of Canada found it necessary to go deep into negative territory, say -6%, there are all sorts of ways it can go about doing so without causing stress in money markets. In fact, economist & blogger Miles Kimball recently visited the Bank of Canada to explain how to go about implementing extremely low rates without igniting a run into paper dollars, or what he refers to as massive paper storage. I've written about some "lite" ways to go about doing so as well.

Interestingly, Kimball writes that the Bank of Canada already has an “Effective Lower Bound” working group that is focused on "exploring the possibilities for negative interest rate policy in the next recession." So while the public discourse on Canadian monetary policy seems to have settled on the "one remaining lifeline" view, it appears that internally that is not the case—the Bank of Canada knows that it has much more up its sleeve.

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Various charts:

Woodford's forward guidance—why not use forward contracts instead?

...once the supply of reserves is sufficient to drive the short-term riskless rate to zero..., there is no reason to expect further increases in the supply of reserves to increase aggregate demand any further... Once banks are no longer foregoing any otherwise available pecuniary return in order to hold reserves, there is no reason to believe that reserves continue to supply any liquidity services at the margin; and if they do not, the Modigliani-Miller reasoning applies once again to open market operations that increase the supply of reserves, just as in the model of Wallace.

-Michael Woodford, 2012.  

On a whim, I wrote an email to Michael Woodford last week. Woodford, a macroeconomist at Colombia University, is the authour of Interest and Prices (pdf), an important contribution to modern monetary policy. I'll be the first to admit that I haven't been able to work my way through his book—too few words and too many equations. But I have read two excellent papers by him. The first is Monetary Policy Without Money, which I'll touch on in another post, and the second is a well-known paper that he presented at Jackson Hole in 2012 entitled Methods of Policy Accommodation at the Interest-Rate Lower Bound. If you're interested in monetary policy and you haven't read it yet, you really should.

My email, affixed below, had to do with the above quote from his second paper:

Dear Professor Woodford,

I have read your paper Methods of Policy Accommodation at the Interest-Rate Lower Bound several times and it has taught me quite a bit.

One question:

In Section 3.1 (Effects of Targeted Asset Purchases in Theory), you point out that once the supply of reserves is sufficiently plentiful, banks no longer forgo a pecuniary return that would otherwise be provided by reserves (ie a marginal convenience yield). This is the point at which the overnight interest rate hits the lower bound, additional reserve additions are irrelevant, and the Modigliani-Miller result applies.

It seems to me that the overnight rate doesn't shadow the general convenience yield on reserves per se, but rather it shadows the 24-hour convenience yield on reserves. Just like there is a term structure to bonds, there is a term structure to the convenience yield on reserves. In addition to a 24-hour convenience yield, there is a 1 week, 1 month, 1 year yield, each point allowing us to construct a convenience yield curve.

Although the overnight yield may be zero, convenience yields further down the convenience yield curve may still positive. Banks hold reserves not only to enjoy their overnight convenience, but also to enjoy expected flows of future convenience. This would seem to imply that the present discounted value of future flows of convenience can be positive even when the overnight convenience yield is zero.

Which would indicate that even when we are at the lower bound for overnight rates, purchases are not necessarily subject to the Wallace irrelevance critique insofar as they specifically target positive yields further down the convenience yield curve. If purchases today can reduce convenience yields tomorrow, the present discounted value of future flows of convenience will be reduced. Overnight purchases won't suffice since they only target overnight convenience yields. Open-ended outright purchases might not work if there is no commitment to avoid unwinding these purchases in the future. Perhaps long term repo operations that target the distant end of the convenience yield will be most effective in avoiding the irrelevance criticism. Repos precommit a central bank to avoid unwinding at a future point in time, thereby reducing future convenience yields and, as a corollary, the present value of total convenience flows.

Does that make any sense? I am curious what your thoughts on this are.

Cheers,

JP Koning

Frequent readers will notice that my letter was just a summing up of my three recent posts on the convenience yield.* If you've already read those three posts and reached your quota, don't bother reading further, since much of what I'm going to write follows in that general theme.

Surprisingly, Woodford got back to me. I'm not going to publish his response, but in brief he doesn't think that there should be a convenience yield curve. Woodford told me that he thinks reserves are an overnight asset, not a long-term asset like, say, Treasury bills, and an overnight asset doesn't supply a convenience yield for longer than 24 hours.

I agree with Woodford that the convenience yield supplied by a short-lived asset is negligible. No one holds a stock of ripe avocados because they might serve as convenient medium of exchange 30 days from now.

But reserves aren't avocados. They are infinitely-lived instruments that can be perpetually held without the necessity of paying storage fees. This means that even when overnight yields have hit 0% (as indicated by an overnight fed funds rate of zero) reserves still supply current reserve-owners with a positively-valued marginal convenience yield over longer time frames than the 24-hour window. The implication of this is that although central banks may no longer be capable of manipulating the 24-hour convenience yield lower, they may be still be able to conduct targeted financial transactions, or balance-sheet policy, that change distant parts of the convenience yield curve. This gives a central bank plenty of traction at the zero lower bound. After all, a reduction in the future convenience flows thrown off by reserves will reduce the present value of all convenience flows. The expected return on reserves having been reduced, reserves will be spent away in the present and this will stimulate today's inflation and/or real activity.

QE—what Woodford refers to as balance sheet policy—is a fairly blunt tool when it comes to reducing distance convenience yields.** This is because a one-time expansion of the central bank's balance sheet can be easily reversed at a future point in time by sucking reserves back in. Financial markets may therefore view QE as fleeting. If so, distant convenience yields will not budge much and, as a result, inflation and real activity will remain unaffected.

Rather than engaging in crude QE when the overnight rate hits zero, a central bank might enter into a more focused form of balance sheet expansion. Five-year repos, for instance, may be sufficient to ensure that excess reserves stay in the system for an extended period of time. Even more effective would be a policy of entering into forward contracts with banks. These transactions would commit the central bank to purchasing assets at various points in the future, thereby ensuring a series of large balance sheets down the road.

For instance, if the Bank of Canada faced the ZLB and wanted to reduce the future convenience yield on reserves after, say, 2015, it could contract with commercial banks to purchase assets at various dates in 2016, 2017, and 2018. It would enter into as many of these forward contracts as necessary to guarantee today a sufficiently large supply of reserves tomorrow. Unlike crude QE, forward contracts are irreversible. The permanency of these transactions should be sufficient to reduce the future convenience yield on reserves, thereby diminishing their expected return in the present and stimulating current spending.

A policy of using forward contracts to reduce the distant convenience yield on reserves could be a substitute for Woodford's verbal forward guidance. Rather than specifying in words the future time path of interest rates, the central bank need only add a sufficient amount of forward contracts to its balance sheet in order to ensure that it hits its targets (an inflation target, a nominal GDP target, whatever). The upshot is that balance-sheet policy needn't die at the zero-lower bound. Concrete actions that guarantee to alter the size of a central bank's future balance sheets and convenience yields can be just as effective as Woodford's carefully crafted wording.

In any case, I'm not holding my breath for Woodford to get back to me on that, he's a busy guy.

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*Interestingly, Woodford uses the term convenience yield in his paper, too.
** Miles Kimball has equated balance sheet policy at the ZLB to using a massive fan to move the economy.

Transporting the macroblogosphere back to 1809: Usury Laws and the 5% upper bound

The zero-lower bound is the well-known 0% floor that a note-issuing bank hits whenever it attempts to reduce the interest rate it offers on deposits into negative territory. Should the bank drop rates below zero, every single negative yielding deposit issued by the bank will be converted into 0% yielding notes. When this happens, the bank will have lost any ability it once had to vary its lending rate.

The ZLB is an artificial construct. It arises from the way the banking system structures the liabilities that it issues, namely cash and deposits. We can modify this structure to either remove the ZLB or find alternative ways to get around it. Much of the discussion over the econblogosphere over the last few years has been oriented around various ways to get below zero.

There is another artificial bound, this one to the upside—let's call it the 5% upper bound, or FUB. The FUB is an archaic bound. Up until 1854, the Usury Laws prevented the Bank of England from increasing rates above 5%. This constraint meant that for almost two centuries, the Bank of England's discount rate was bounded within a narrow channel that had as its upper limit the 5% mark as stipulated by the Usury Laws and a lower limit of 0% due to the existence of 0% yielding banknotes (see chart above).

Imagine that we had a time machine and transported the econblogosphere, still hot over the ZLB debate, back to 1809. What sorts of discussions would we be having if we had risen up against the FUB? Given that the conventional route of increasing rates was constrained by the usury prohibitions, what sort of unconventional monetary policies would bloggers be providing to the Directors of the Bank of England to deal with inflationary booms? Would this advice be symmetrical to the policies they have been advocating for escaping the ZLB?

1809 is a significant date because the convertibility of the pound into gold had been suspended for over a decade. Although convertibility would be resumed in 1821, England would be on a 'fiat' standard very similar to our own for another decade. In the years since suspension, the pound had gradually depreciated against gold and other European currencies. A healthy debate began to flourish over whether the Bank of England was responsible for the pound's depreciation (ie. inflation) or if external events such as crop failures were to blame. It was in that context that banker/economist Henry Thornton published his famous Enquiry into the Nature and Effects of the Paper Credit of Great Britain. Although Thornton was circumspect on the precise causes of the deprecation of the pound, he drew attention to the difficulties that the Usury Laws caused in controlling the volume of credit. Here is Thornton:

In order to ascertain how far the desire of obtaining loans at the bank may be expected at any time to be carried, we must enquire into the subject of the quantum of profit likely to be derived from borrowing there under the existing circumstances. This is to be judged of by considering two points: the amount, first, of interest to be paid on the sum borrowed and, secondly, of the mercantile or other gain to be obtained by the employment of the borrowed capital...

The borrowers, in consequence of that artificial state of things which is produced by the law against usury, obtain their loans too cheap. That which they obtain too cheap they demand in too great quantity.

Thornton pointed out that if there was a large deficit between the price at which a businessman could borrow from the Bank of England and the mercantile rate of profit—the rate at which the same businessman could invest the borrowed money—then the demand for and granting of credit would become excessive. While nudging the discount rate higher would normally be sufficient to reduce this excess, the laws against usury might prevent these increases from taking place.

If we were to drop Nick Rowe into the 1809 economic debate, he would complement Thornton quite well by making good use of the same pole-on-a-palm analogy he has so aptly used to explain the ZLB. Running an inflation targeting central bank is sort of like balancing a long pole upright in the palm of one's hand, says Nick. The bottom of the pole is the interest rate and the top is the inflation rate. As the pole starts to lean (ie. the price level begins to change), the holder needs to quickly move their palm far enough in the same direction (ie. interest rates must be changed) so as to stop the pole from falling over. A wall to the either the north or south impedes the holder's palm from moving sufficiently far and will cause the pole to tumble over.

Applying this analogy to monetary policy, the Directors of the Bank of England might be required to stop excess inflation by moving rates north of 5%. With the Usury Laws in place, the Director's efforts would be impeded. Nick's illustration is Thornton all over again.

Scott Sumner, Lars Christensen, David Beckworth, and other monetarist-types have been strong advocates of quantitative easing as a way to get below the ZLB. Whisk them back to 1809 and would they advocate getting above the FUB by quantity dis-easing, or QD — mass repurchases of Bank of England notes through the liquidation of the Bank of England portfolio of assets?

Assuming that the threat of QD is able to increase the expected purchasing power of the pound (just as the threat of QE is supposed to reduce the same), then the Directors could initiate a QD program to improve the real return on pound notes and deposits. As soon as the real return on notes and deposits exceeds real returns on capital, the inflationary boom will come to a halt. Conveniently for the Directors, the nominal 5% rate will have remained in place — only real rates will have increased — thereby allowing the Directors to abide by the Usury Laws.

What about New Keynesians like Paul Krugman? Promising to hold off on future interest rate increases after a recovery has begun is the sort of advice New Keynesians have given to the Fed as a way to bridge the ZLB. This is called providing forward guidance. As Krugman says, a central bank needs to "credibly promise to be irresponsible".

Parachute Krugman into 1809 and he would be counseling the Directors to do the opposite: hold off on reducing rates from 5% after a contraction had already set in. In other words, the Directors need to "credibly promise to be hard-asses." As long as this promise is taken seriously by the market, the promise of future monetary tightening translates into lower inflation in the present, and the real interest rate rises. This should reign in the inflationary boom. Much like Sumner and Christensen, Krugman's advice would allow the Director's to hold steady at the 5% nominal rate dictated by the Usury Laws, letting real rates do the job of reeling in prices and slowing down the economy.

What about Miles Kimball? Transport Miles back to 1809 and he'll probably be the most aggressive in the outright removal of the Usury Laws. Just as he is currently campaigning for the ability of central banks to set negative rates on deposits, I'm sure he'd by picketing outside of Parliament for the right of the Director's to bypass the Usury Laws and set 6-7% nominal rates.

Incidentally, what did the Directors of the Bank of England actually do? According to Jacob Viner, there is evidence that

bankers found means of evading the restrictions of the usury laws. In 1818, the Committee on the usury laws stated in its Report that there had been “of late years ... [a] constant excess of the market rate of interest above the rate limited by law.” Thornton notes that borrowers from private banks had to maintain running cash with them, and borrowers in the money market had to pay a commission in addition to formal interest, and that by these means the effective market rate was often raised above the 5 per cent level. Another writer relates that long credits were customary in London and a greater discount was granted for prompt payment than the legal interest for the time would amount to.

More convincing evidence that the 5 per cent rate was not of itself always an effective barrier to indefinite expansion of loans by the banks is to be found in the fact that the directors of the Bank of England, although they professed that they discounted freely at the rate of 5 per cent all bills falling within the admissible categories for discount, in reply to questioning admitted that they had customary maxima of accommodation for each individual customer and occasionally applied other limitations to the amount discounted.

In Paper Credit we find Henry Thornton verifying Viner's claim, noting the "determination, adopted some time since by the bank directors, to limit the total weekly amount of loans furnished by them to the merchants."

So the Director's preferred route for getting out from under the thumb of the Usury Laws was to maintain the 5% discount rate, but ration the quantity of loans issued at these rates, thereby limiting the quantity of credit in circulation. While this policy might not have been sufficient to prevent an inflationary boom, it may have prevented a hyperinflation from breaking out.

Before I sign off, I want to reverse something I said at the outset. I wrote that the 5% upper bound was archaic, but that's not entirely true. Sure, high interest rates are no longer illegal. But high nominal interest rates have never been politically palatable. Central bankers are not independent of politics, and therefore probably still operate with something akin to a 5% upper bound. Let's call it an "upper-ish" bound, or the point at which a central banker starts to get dirty looks from those who have the power to reappoint him. Central bankers may need to resort to unconventional techniques to free themselves of the upperish-bound. The Fed's motivations for adopting quantity targets in 1979, for instance, may have been such a technique. An overt jacking-up of interest rates to 15-20% would have been political suicide, goes the theory, so the FOMC chose to engage in a bunch of hand-waving about hitting money supply targets, thereby distracting would-be critics with a new set of monetary verbiage. This left Paul Volcker free to implement what would be at its peak a tremendously onerous 22%+ fed funds rate.

We're of course not anywhere near the upper bound these days, at least not in the developed world, but it's still an interesting puzzle to work through in order to help understand the current situation. Our investigation also offers a history lesson. In choosing to remove it over century ago, the FUB was revealed to be neither a law of nature nor a design of God. The FUB was a choice. Hopefully we'll eventually realize that the same applies to the ZLB.