Traditional economic theory suggests that savers would rather hold cash than lose money by leaving it in a bank. Positive interest rates benefit both savers and borrowers. However, in the past few years, central banks have been rethinking the idea of the zero lower bound and pushing interest rates into the negative. In 2009 and 2010, Sweden led the way as the first nation to set negative interest rates following the financial crisis. Switzerland and Denmark have since followed suit. Last year, even the European Central Bank issued a negative interest rate. Since the absolute value of these interest rates is so low (mostly around -0.75% and -0.85%), there has not been a huge amount of backlash since the negative rates have in fact benefited these nations’ economies. Overall, this technique has given central banks the ability to change the way that they conduct policy. Having the ability to set negative interest rates is enabled by such low inflation of recent years.
http://www.wsj.com/articles/negative-interest-rates-yield-positive-resultsso-far-1425489466
4 Comments
If I remember correctly, I think Japan has actually suffered from liquidity trap? I wonder what makes Japan and these two European countries different in that the former has been adversely affected by the negative interest rate and the latter two have not. Also, what was the political implication of negative interest rate in Switzerland and Denmark? To reduce saving and boost aggregate demand?
Aren’t the US, Japan and the EU all in liquidity traps? Of course there are true believers in “money” who don’t believe such can ever exist…..but I try not to base what I say on revelation from some higher authority….such as several libertarian politicians whose economics come from the novels of Ayn Rand. There’s no fighting that except (if it’s you’re district) trying to get someone elected who’s willing to be influenced by data.
Since cash is extremely inconvenient it appears that big users are willing to pay to keep money in a bank in a form that can be readily used for payments. So now the empirical question is what forms of near-money are there that can serve as substitutes, and if interest rates are negative, to what extent can businesses and banks economize on their holdings by swapping in and out of near-money for which you don’t have to pay a storage fee.
After reading this article I think its important to note that Denmark, who had the largest negative rate, was doing so to keep the krone balanced with the Euro. I find it interesting that we do find cash so inconvenient. I would say most people use their debit cards, venmo, or their iPhone to make payments. I find it rare when anyone uses cash to make a purchase. I think the professor is on the right track with “to what extent can businesses and bank economize their holdings…”
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