So much for the zero lower bound.
Buried in the statement accompanying the Riksbank's interest rate cut today was the news that Sweden's central bank had cut its deposit rate to -0.25%. This is the first time (I believe) a major central bank has targeted negative rates.
The deposit rate is analogous to the Fed's recently acquired ability to pay interest on reserves. Both rates are meant to act as a floor on the central banks' key monetary policy tool--the fed funds rate in the U.S. and the repo rate in Sweden. (For what it's worth, that floor hasn't always been impervious. For example, when the reserve rate was first introduced back in late 2008, the fed funds rate was often below it.)
So, could the Fed follow suit? Greg Mankiw and Willem Buiter have made good cases for why negative interest rates in general could help the economy, but Paul Krugman argued earlier this year (and Mankiw expressed a similar view) that "you can’t cut interest rates below zero (if you try, lenders will just hoard cash.)" We'll see if the Riksbank's move proves that view wrong.
Meanwhile, Scott Sumner explains why it could make sense for the Fed to cut interest on reserves below zero:
I actually think a negative rate on reserves could do even more good in the US. We have something closer to a closed economy model, by which I mean that for all sorts of political reasons the Fed probably does not view currency depreciation as a viable policy instrument. In that case we need domestic reflation. In addition, there are already massive excess reserves in the US, so with a negative rate on reserves we could expect banks to engage in large purchases of assets with those reserves. Even if they just bought T-bonds, it would slightly lower yields, and also push more money out into circulation.
--Zubin Jelveh