Negative Interest Rates, NIR, interest rate theory, inflation rate, nominal interest rate, real interest rate, European Central Bank, monetary policies, quantitative easing, economic crisis, deflation, recession
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This document explains the concept of negative interest rates, their causes, and effects on the economy, including their impact on borrowing and lending.
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[...] (2018). Negative interest rates: Lessons from the euro area. Unpublished Manuscript. Glover, A. (2019). Negative Nominal Interest Rates Can Worsen Liquidity Traps. Federal Reserve Bank of Kansas City Working Paper, (19-07). Ito, T. (2019). Long-term interest rates under negative interest rate policy: Analysis of Japanese government bond and swap markets. Journal of Corporate Accounting & Finance, n/a(n/a). [...]
[...] TINs aim to stimulate spending rather than saving. These expenditures could contribute to stimulating the economy and increasing prices. Europe and Japan have resorted to TINs to reduce the risk of deflation, which has many negative effects, such as making debt repayment heavier over time. Central banks have direct control only over short-term interest rates, such as those charged to financial institutions that hold deposits in these central banks. However, the reduction of short-term rates tends to have an impact on the economy, leading to a decrease in long-term rates that are governed by supply and demand. [...]
[...] //doi.org/10.1002/jcaf.22410 Levy-Garboua, V. (2017). Chapter Negative Rates: The Transgression. In The World at Zero Interest Rate: A Journey to the End of the Economy. Presses Universitaires de France. Tan, G. Beyond the Zero Lower Bound: Negative Policy Rates and Bank Lending (September 26, 2019). De Nederlandsche Bank Working Paper No September 2019. [...]
[...] However, the economic reality was quite different and the risk of granting loans remained higher than that of having to pay interest on deposits. Thus, the positive consequences of TINs for governments, which allow them to pay their deficit and debts in a relatively easy way, remain ridiculous compared to the negative long-term consequences. In fact, the day when the rates will increase, it will completely unbalance the budgets and increase the debt in an entirely unacceptable way. The logic of the functioning of capitalism has always been a logic of growth, therefore of an increase in production, and it is based on a logic of capitalization of capital that passes through positive interest rates. [...]
[...] In a period of deflation, savings decrease. Conclusion The application of TIN has led banks to modify their economic model and rebalance their portfolio in risk strategies. The short-term profitability of banks has remained somewhat unchanged, but long-term profitability has become much more complicated. Due to the new low-interest loan model to the most risky clients and, possibly, financing/creation of zombie companies that would not exist in a world with higher interest rates." To summarize the long-term effect of TIN on economic stability, it is worth noting first that households are discouraged from saving and therefore encouraged to borrow, leading to an increase in household debt and dependence on easy money. [...]
