The negative effects of negative interest rates (original) (raw)
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NEGATIVE INTEREST RATE POLICY AS CONVENTIONAL MONETARY POLICY
As long as all interest rates move in tandem – including the rate of return on paper currency – economic theory suggests no important difference between interest rate changes in the positive region and interest rate changes in the negative region. Indeed, in standard models, only the real interest rate and spreads between real interest rates matter. Thus, in most respects, negative interest rate policy is conventional. It is only (a) what needs to be done with paper currency, (b) difficulties in understanding negative rates or (c) institutional features interacting with negative rates that make negative interest rate policy unconventional.
Journal of Risk and Financial Management
Negative interest rates are an invention of monetary authorities to show that monetary activism does not have boundaries, i.e., as if there is no such thing as a liquidity trap. Their presence in the financial landscape has redefined the benefits to savers and to investors. Governments can now borrow at will without visibly adding to budget deficits. This makes negative interest borrowing an alternative to raising taxes. Banks can now achieve regulatory compliance partially at the expense of depositors. Commercial banks pay to keep money at the central bank instead of earning interest on it. This paper shows the true nature of negative interest rates and their consequences on various economic agents and performance measures, specifically on economic growth and exchange rates. In addition, this paper demonstrates that the arguments in favor of negative interest rates have been largely exaggerated based on the weight of the evidence that shows the United States, which never issued neg...
Negative interest rates: a Keynesian perspective
Review of Keynesian Economics, 2019
One of the most surprising recent developments in financial markets has been the emergence of negative yields on long-term debt. This development contradicts the notion of the zero lower bound which, until recently, was taken as a given in monetary policy discussions. In this paper, I look at the phenomenon of negative yields through the lens of Keynes's liquidity-preference theory of interest. I review changes to the financial market environment that have led to a shift in the liquidity of government bonds relative to bank deposits, and with this empirical context in place, I argue Keynes's theory is consistent with the phenomenon of negative bond yields. Finally, I consider Keynes's thought in relation to a negative interest-rate policy (NIRP) and argue that while he would be opposed to a NIRP as a temporary expedient, a mildly negative policy rate fits with his long-run vision for a world with a zero risk-free long-term interest rate.
From low to negative rates: an asymmetric dilemma
Financial Stability Report, 2016
With the expansionary monetary policy in several European countries continuing, the low interest rate environment is being increasingly replaced by a negative interest rate environment. We estimate a panel model to study the effects of prolonged low interest rates on banks in Austria. It shows that the profitability of banks declines in times of low interest rate environments. However, we are skeptical of extrapolating these findings to the negative environment. In a negative environment banks face an asymmetric dilemma: While the returns on many assets follow the decreasing reference rate (e.g. EURIBOR), costs of deposits are floored at zero and cannot follow this rate. In order to include this crucial nonlinearity and to estimate which banks are expected to suffer most, we amend our approach and employ an ARIMA model on a bank-by-bank basis. First, we find that small regional banks are hit hardest. These banks have a high share of deposits and are more sensitive to changes in the ...
QE and Negative Interest Rates: What is the impact on the global financial stability
Quantitative easing and negative interest rates have attracted the attention of numerous researchers in recent years. There is a limited number of countries in the world such as Japan, Switzerland, and Sweden that carry out their quantitative easing programs and negative interest rate policy. Yet, it has been criticized for its spillovers on emerging market economies.
Negative interest rates: why and how?
Mathematica Slovaca, 2017
Interest rates (or nominal yields) can be negative, this is an unavoidable fact which has already been visible during the Great Depression (1929–39). Nowadays we can find negative rates easily by e.g. auditing. Several theoretical and practical ideas how to model and eventually overcome empirical negative rates can be suggested, however, they are far beyond a simple practical realization. In this paper we discuss the dynamical reasons why negative interest rates can happen in the second order differential dynamics and how they can influence the variance and expectation of the interest rate process. Such issues are highly practical, involving e.g. the banking sector and pension securities.