To prevent a slide into deflation, the euro area central bank, the central bank of Japan and the Fed of U.S. are now looking favorably at keeping interest rates below zero.
The article mentions that theoretically this should reduce borrowing costs, thereby increasing the pool of loan-able funds. In practice however, customers might lose faith in the financial market and instead begin to hoard money outside of banks.
Here's the article link: http://www.bloombergview.com/quicktake/negative-interest-rates
This is also related:
http://www.cnbc.com/2016/02/24/why-the-feds-inflation-strategy-will-fail-commentary.html
Another facet of these negative interest rates in practice is that in practice it has been inconclusive as to if they actually work to stimulate the economy or not. As Areena stated, it could cause consumers to hoard or save their money instead of spend it as we say after the 2008 crisis. In addition to this, I do not think the negative interest rate situation will be put onto the table for serious discussion until the economy drastically worsens from where it is now. Currently, I think we have more options than just negative interest rates to fix our economic problems and all of those should be exhausted before we entertain this idea as a viable solution.
ReplyDeleteI think that this would not be a good strategy because if this is done, people will save less of their money because there is less of an incentive to save. This could lead to a decrease in investment, which is bad for the long run of the economy. I think that in order to secure a strong economic future we should work towards a higher interest rate.
ReplyDeleteI have to agree with the above commenters. Negative interest rates are used so rarely, that there is not enough data to know if they actually work. I would try all other economic stimulating techniques before I tried this. Because of the lack of previous data, I would be shocked if this becomes widespread.
ReplyDeleteI agree with the above comments. I think that if anything the interest rates may be brought back down to what they had been before the start of the interest rate increase seen in 2015. I think a negative interest rate may be needed in a more dire situation, almost as a last choice. The U.S. economy has done more than fine in its growth with a low interest rate. Either way, I think the Fed needs to decide and announce what it is planning on doing, as I believe this skepticism of not knowing what the interest rate will be has led to some stagnation in our economy.
ReplyDeleteTheoretically negative interest rates mean that the borrower will gain at the expense of the lender. This strategy should be a last resort to try to stir the economy and make its GDP increase. Negative interest rates can effect the investment, consumption savings components of GDP. The backlash of this can be that people loose trust in the banking system and withdraw their money and save in other countries which can have further implications for the country.
ReplyDeleteTheoretically negative interest rates mean that the borrower will gain at the expense of the lender. This strategy should be a last resort to try to stir the economy and make its GDP increase. Negative interest rates can effect the investment, consumption savings components of GDP. The backlash of this can be that people loose trust in the banking system and withdraw their money and save in other countries which can have further implications for the country.
ReplyDeleteI see no reason to invest or keep money in banks when your money is sitting there depreciating. I believe this will end with backlash because although banks are a safe place to keep money, the risk, to me, is worth it. I certainly don't want my money decreasing in value when I could do something to prevent that.
ReplyDelete