Let's say the global stock market crashes in the coming months (it's currently at an all time high in the western world). What happens to interest rates?

"Usually", as I understand from my absolute layperson perspective, interest rates would be lowered as a counter measure. But what happens if interest rates are already (nearly) zero, as is the case in some countries?

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    $\begingroup$ Just a note to say that there’s a difference between movements in the stock market and in the macroeconomy (despite how one prominent president seems to believe! 🙂). Sure, they’re sometimes related, but it would be more usual to expect Central Banks to change interest rates in response to changes in the macroeconomy rather than to the stock market. So, one answer to your question might be: interest rates would not change (say, if there was a daily crash unrelated to the real economy). On the other hand, if the crash was related to some longer term macro development then the Central Bank (1/2) $\endgroup$ – Graeme Walsh Jan 20 '20 at 10:08
  • $\begingroup$ Could respond with negative interest rates or some other form unconventional monetary policy (as mentioned in muflon answer below). 2/2 $\endgroup$ – Graeme Walsh Jan 20 '20 at 10:11
  • $\begingroup$ @GraemeWalsh I was thinking about a global, severe crash, the likes of 2008, dotcom, .... these severely affected (or were affected by, don't want to get into this here) the macroeconomy $\endgroup$ – Elon Musk Jan 21 '20 at 12:19

They would be just pushed to their lowest possible level. Recent experience in Switzerland and Germany shows the interest rate can be slightly negative but that’s it. Once the interest rate hit (zero) lower bound it can’t be pushed further as long as there is cash that carries implied zero interest. At that point central bank would have to resort to other policy instruments such as QE, helicopter money, forward guidance etc.

However, if some western country would decide to go completely cashless it would be possible to have arbitrary negative interest rate. In that case the interest rate would just get pushed further down.

  • $\begingroup$ Time has proven this answer to be absolutely correct. Accepted! $\endgroup$ – Elon Musk Jun 15 '20 at 20:56

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