A negative interest rate also leads people to ask the bank for a loan instead of patiently sparing money, and as far as I understand banks love this (more power upon people and free money!).
For people asking why is there even such a thing as negative interest rate (lend $100, get back $99), NPR Planet Money has a good explainer. TL;DR: There's a lot of cash in search of investment. While waiting for opportunity, you could stash it under the mattress. But that's not safe, you'd probably have to buy a safe, hire some guards. Also it's not very liquid. So you pay a bank to hold it for you, put it in their safe, use their transfer system, etc. Tah-dah: negative interest rate.
The argument against negative interest rates was that people could simply store cash in a vault and get a 0% return, rather than lend it for a negative return. In practice very slightly negative rates seem to work out because storing large amounts of cash in a vault is hard. However, it's probably still right to assume that if interest rates are meaningfully negative for a while everyone will switch to storing cash.
It's a cost of having money, but not spending it. The central bank pays a negative interest on excess deposits. So banks are motivated to lend it out. (Eg. take on more risk.)
One problem that becomes a bit hard is that in the retail sector if interest rates go below zero people are willing to simply withdraw the money, which would hurt banks' ability to lend. (Eg. the central bank would have to add funding via some mechanism, such as lowering the fractional ratio, or QE . [Or paying interest on reserves. But that would go against the negative interest on excess reserves.])
The paper concludes that the negative interest rates resulted in more loans.
In principle there is nothing wrong with loans. The problem is that people can simply hold cash for free. They demand +x% (liquidity preference) on top of the guaranteed 0% so the market interest rate never actually falls to zero. Central banks have to simulate negative interest rates via quantitative easing it is completely backwards.
The funny thing about the second is that there actually are some people who would in fact voluntarily lend at negative rates if they are defined as lower. But that is getting into Forex messiness and stability aspects.
Monetary rates being negative are a big deal in a way negative real rates aren't. When you pay the bank to hold money, you begin to see cases where it is most rational to hold cash instead.
Don't you have that backwards? Low interest rates are good for debtors - they pay less interest. Negative interest means you're being paid for borrowing.
It isn't. People keep credit (aka bank money) in their bank accounts even at negative nominal interest rates. The problem is the insistence on positive interest because of moral attachments to the idea of frugality.
Central banks target positive inflation because of the inability to cut interest rates below zero.
If there is a negative interest rate of 4% on cash, then the easiest way to avoid it would be to lend out your money at 0%. Since there is no growth dependence and excessive savings do not grow automatically anymore there is no need for inflation and the central bank can do price level targeting instead.
Okay, I'm not quite understanding the idea of the negative interest rate other than it's levied against people who hold on large stores of cash in their accounts. My question is under what situations would a bank implement such a policy? It is because there's no way for a bank to invest the funds? Or is it something deeper?
It's when, despite low/negative rates, borrowers prefer to hold cash than to take out loans.
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