Background
A negative interest rate refers to the scenario where a central bank charges commercial banks a fee for holding excess reserves in their accounts with the central bank. This phenomenon is contrary to the conventional positive interest rates where banks earn interest on their deposits.
Historical Context
Negative interest rates have been employed by several national central banks as an unconventional monetary policy tool. Notably, countries such as Denmark (since 2012), Japan (2016), Sweden (2009), Switzerland (2014), and the European Central Bank under its jurisdiction (2014) have implemented this policy at various points to achieve specific economic objectives.
Definitions and Concepts
- Negative Interest Rate: A charge levied by a central bank on deposits held by commercial banks, often beyond a certain threshold, aimed at encouraging lending and spending to stimulate the economy.
- Currency Appreciation: An increase in the value of a currency in terms of its exchange rate equivalents with other currencies.
- Inflation: The rate at which the general level of prices for goods and services rises.
- Deflation: The decline in the general price level of goods and services, often linked to reduced spending and economic contraction.
Major Analytical Frameworks
Classical Economics
In classical economics, the concept of a negative interest rate is generally not considered, as fundamental assumptions typically involve positive interest rates driven by savings and investments.
Neoclassical Economics
Neoclassical models also assume positive interest rates for their consistency with market equilibrium theories, making negative interest rates an unconventional policy measure not typically addressed directly.
Keynesian Economics
Keynesian economics supports the use of unconventional monetary instruments, such as negative interest rates, to stimulate aggregate demand during periods of low growth and deflation.
Marxian Economics
While Marxian theory does not directly consider monetary policy aspects like negative interest rates, it would critique them as measures that reinforce capital’s control over financialization and defer structural economic imbalances.
Institutional Economics
Institutional economists would focus on the impacts of negative interest rates on financial systems and how institutional arrangements shape economic responses to such policies.
Behavioral Economics
Behavioral economics would investigate how negative interest rates affect the behavior of banks and consumers, including the psychological resistance and unusual spending patterns they might initiate.
Post-Keynesian Economics
Post-Keynesian economics might support the usage of negative interest rates under a scenario of liquidity traps and insufficient aggregate demand to provide additional economic stimulus.
Austrian Economics
Austrian economists usually criticize negative interest rates heavily, perceiving them as artificial distortions of the market process and price signals, which might lead to long-term economic distortions.
Development Economics
From a development economics perspective, negative interest rates usually receive less focus, though the impacts on currency valuation and trade balances might be noteworthy for developing economies.
Monetarism
Monetarists are generally critical of such measures, as they perceive the risks of distorting money supply’s natural market role, preferring rules-based monetary policy frameworks instead.
Comparative Analysis
Evaluating the effectiveness of negative interest rates includes balancing benefits such as preventing deflation and boosting lending against potential drawbacks such as reducing banking sector profitability and inducing unconventional financial behaviors.
Case Studies
European Central Bank
Since 2014, the European Central Bank’s (ECB) negative interest rate policy aimed to counteract weak inflation and stimulate eurozone economies. The policy implications included more competitive exchange rate levels and strengthened lending.
Denmark
The Danish central bank used negative interest rates to defend against excessive foreign investment inflows and excessive currency appreciation retracting the competitive edge for exports.
Suggested Books for Further Studies
- *“The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse” by Mohamed A. El-Erian
- *“The Age of Central Banks” by Curzio Giannini
- *“Money Changes Everything: How Finance Made Civilization Possible” by William N. Goetzmann
Related Terms with Definitions
- Interest Rate: The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.
- Quantitative Easing (QE): A monetary policy where a central bank buys specified amounts of financial assets to inject money into the economy to expand economic activity.
- Liquidity Trap: A situation in which low/near-zero interest rates fail to stimulate consumer spending and investment.
