(This is 1st part of series of questions under "Negative interest rates")

I've happen to stumble on two articles, with some weeks, that the central bank(CB) of switzerland, due to Russia ruble crisis, and being a stability haven, has decided to use a negative nominal interest rate for reserve deposits of banks at the CB, to facilitate the exchange rate peg. Bank of Japan(BoJ) also seems have implemented a nominal negative interest rate, even if for different reasons(not sure about the reasons).

In all textbooks, the topic of negative interest rates is easily dismissed, or simply taught of as impossible, and so the authors work with non-negative lower bound(ex:deflation trap). Almost every part of the economic theory is going to be influenced by this.

Hence I'm dividing my question into several.

This part is for monetary policy. With negative interest rates, what changes for monetary policy(scope, effects, etc.) can we expect?

Any help would be appreciated.

Edit: Here is an article by Nouriel Rubini on negative nominal interest rates. He writes on why these negative rates exist, their rationale, and one possible way(fiscal policy) to bring the economy out of this situation.


1 Answer 1


Real interest rates can be negative without a negative benchmark rate set by the central bank (inflation is higher than nominal interest rates) so in that sense we won't see any new effects.

Regarding the interest rate set by the Central Bank, it does decrease the real interest rate as the banks won't deposit money and have more incentive to give out loans but effectively it is not different from a zero rate (you can't force the bank not to sit on the cash) though I guess the bank has to pay the interest on the mandatory deposits.


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