The ECB's long-standing negative rates policy remains unpopular in a union of chronic high savings (demand deficits) & yield-hungry investors. Here I argue that the ECB must do everything it can to escape its liquidity trap of “negative rates forever” CC @elerianm @VMRConstancio

First, negative rates are a reflection of a problem. Sub-zero arrived in Europe in 2014 in response to a critical problem of policy credibility – the arrival of the zero lower bound for the ECB’s main policy rate in the face of persistently low inflation expectations /thread/ 2/n

Europe, like much of the developed world, had seen a secular decline in the trend real rate even before the Covid19 shock, reflecting ageing populations and slower trend productivity growth - higher hhlds savings demand, lower business demand for capital #ECB #negativerates 3/n

The structural shock of the pandemic only accelerated the processes that began a decade ago with the Global Financial Crisis and the Euro government debt crises, pushing the eurozone trend rate even lower. #ECB #negativerates 4/n

This leaves the ECB facing a symmetric credibility challenge. In normal times, the ECB policy rate will follow the trend rate lower. If expected inflation adjusts to the demand-determined output gap, then the policy rate must fall below the equilibrium rate to bridge the gap. 5/n