King Rat (gkr) wrote,
King Rat

Negative interest rates

One of the problems with the economy is that we are up against the zero lower bound. For my non-economics inclined friends, one of the ways that the government (specifically the Federal Reserve, our central bank) manages things is by raising or lowering interest rates. If inflation gets too high, they raise interest rates. If unemployment gets too high, they lower them. In other words, to combat high inflation, they put people out of work. To combat high unemployment they allow inflation to rise.

However, unemployment has been high in the U.S. for long enough that the Fed has run out of room to lower interest rates. It’s been at 0.25% since December 2008. They can’t lower it any more, which causes all sorts of issues. Paul Krugman has been blogging about this for 3 or 4 years.

However, it turns out that the zero lower bound is more psychological than real. I missed it at the time, but Sweden instituted a negative interest rate in August 2009. Banks that banked their money with the Swedish central bank actually paid a penalty to do so. I don’t think they went negative on interest rates to loan money, which might be more complicated. The Fed funds rate above is more like the second, but the two interest rates should move in tandem. (Couldn’t find a link to the comparable Fed rate.)

What penalizing banks for saving money does is make it worth their while to loan it out, where they can make money.

And what’s the result been? Sweden’s highest quarterly growth rate ever.

crossposted from King Rat.

Tags: common knowledge

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