So I’ve been reading an article on AP about negative interest rates and it really didn’t seem so bad. There were a bunch of quotes in it that basically sounded like “NEGATIVE RATE BAD!! SCARY!!” but without actually having any content pertaining to the possible risks.
It seems totally intuitive to me that you would do this if you wanted to punish people for huddling up avoiding investment and keeping every cent in the bank instead of stimulating the economy. It also seems like an efficient tool for battling capital strikes.
What is the massive risk that people are afraid of there?
In: Economics
I assume you’re talking about monetary policy. This relates to the issue of the “zero lower bound” (ZLB). Central banks can TRY to set funds rates below 0. Their policy models might even tell them that’s exactly what they should do in order to stimulate growth. However, it’s very hard to set a rate below 0 because at that point banks and citizens start to have better outside options. If you can either hold cash at a 0 interest rate or bank with the Fed at a -1% interest rate, you just hold cash. Central banks have found some creative ways around this problem (like quantitative easing), but they have downsides.
Because policymakers can’t achieve negative interest rates, they try to avoid situations where negative interest rates are called for. If the ZLB wasn’t a thing, you could keep rates higher even when there were fears of recession. If the recession actually happens, you can adjust to negative rates to compensate. In actuality, you could find yourself stuck in recession for a long time with no way to get out. Instead, policymakers favor lower rates in the hopes it will keep them from ever wanting to use negative rates.
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