I would like to know if there are other factors that can devalue a currency. I think the effect of the negative interest rates will not be much greater than the 0% interest rate because simply a very few people would put their money in the bank. Maybe increasing the salary of the governmental employees would devalue but I think it's not a practical solution. Does 0% interest really mean the minimum value of the currency?

  • $\begingroup$ What do you mean by "value of the currency"? Are you referring to exchange rates? $\endgroup$
    – Giskard
    Sep 22 '19 at 14:37
  • $\begingroup$ No. I mean how much products and services that a specific amount of money can buy. When money is devalued, it buys less goods and services for the same amount of money. $\endgroup$ Sep 22 '19 at 15:56
  • $\begingroup$ I think this will affect the exchange rate as well $\endgroup$ Sep 22 '19 at 15:58

Can the inflation rate rise even if the interest rates are below 0%?

In short, yes. The inflation rate rises when more money chases goods and services than before. This can happen because there is

  • more money circulating
  • less goods and services output
  • money is circulating at a faster pace (increased money velocity)
  • money is chasing a narrower set of goods and services

Note the last point decreases the inflation rate for the goods and services that are no longer chased.

In the short term, when interest rates lower, people borrow more money to spend as borrowing is cheaper. Assuming no change in the goods and services output, the inflation rate should rise.

As you mention, you can raise government employee salaries. And you don't have to necessarily limit the salary raise to government employees: an earned income tax credit would have the effect of raising most people's salary. Or more generally, you can expand on fiscal spending: build bridges, fix roads, launch rockets, etc. Assuming this fiscal spending is financed through government debt and there is a budget deficit, there is now more money chasing existing goods and services in the short term, and thus the inflation rate should rise in the short term. Over the long term, productivity gains from fiscal spending should increase the output of goods and services and offset the inflation spike.

You can also just print money and dump it off a helicopter. This will again cause more money to circulate and raise the inflation rate in the short term. What happens over the long term depends on how effectively people spend helicopter money.

  • $\begingroup$ Thank you so much Kent for the answer. $\endgroup$ Sep 23 '19 at 6:40

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