Negative Interest Rates Explained

In July of 2009, the Central Bank of Sweden lowered its overnight deposit rate to negative 0.25% – effectively charging the country’s retail banks to pay it to look after it’s money.

At the turn of the millennia, negative interest rates were somewhat of an economic fantasy: the same way that lightspeed travel is a fantasy for theoretical physicists. Economists had speculated about what negative interest rates would mean, but nobody actually ever expected this phenomenon to exist in the real world.

Today negative interest rates dominate the market for sovereign bonds and are the staple of many central banks. But how in the world does this make sense? Who in their right mind would pay someone to take their money? … All this and more in today’s episode! Enjoy!

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References –

Buiter, W.H. and Panigirtzoglou, N., 2003. Overcoming the zero bound on nominal interest rates with negative interest on currency: Gesell’s solution. The economic journal

Ilgmann, C. and Menner, M., 2011. Negative nominal interest rates: history and current proposals. International Economics and Economic Policy

Rognlie, M., 2016. What lower bound? Monetary policy with negative interest rates

Bech, M.L. and Malkhozov, A., 2016. How have central banks implemented negative policy rates?. BIS Quarterly Review

Scheiber, T., Silgoner, M. and Stern, C., 2016. The development of bank profitability in Denmark, Sweden and Switzerland during a period of ultra-low and negative interest rates

Danthine, J.P., 2018. Negative interest rates in Switzerland: what have we learned?. Pacific Economic Review

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