Although negative interest rates have adverse economic impact in Japan and Eurozone, Sweden has been benefiting from adopting negative interest rates. Negative interest rates lead people with saving to lend money with lower interest rates. Borrowers take advantage of the lower interest rates and spend more, helping to push economic growth higher. Riskbank, Sweden’s central bank, has been trying to raise the annual inflation rate to 2% and negative rates help reach the target by creating inflation. Sweden’s currency, the krona, has been appreciating and it makes goods from Sweden more expensive than those of the rivals, making their goods less competitive. Negative rates cause inflation and reduce the value of the currency helping Sweden’s goods more appealing on global market.
http://www.marketwatch.com/story/guess-the-one-country-where-negative-interest-rates-may-actually-be-working-2016-04-20
This is an interesting article. When we talk about the monetary policy, we always mention to increase or decrease interest rate but have not talked about the policy of negative interest rate. From the case of Sweden, we can figure out negative interest rate is a quick method to stimulate investment, achieving inflation. At the same time, saving gonna decrease and aggregate demand will increase quickly. Also, negative interest rate would weak the national exchange rate, investment from foreign countries increase, and more currency is needed. And as the article talked about, lower exchange rate would increase the price of import stuff and the income of export. I feel it's actually a really direct and immediate method. However, all of these changes require more money to be provided. And that's why negative interest rate method is not that efficient in Japan and Eurozone because money supply there is restricted.
ReplyDeleteLeave it to Sweden to benefit from negative interest rates. They have such a good economy right now that raising inflation and lowering the value of their currency is a good thing! My concern is that when they have reached their goal of increased inflation and the lowered currency value, what will they do next?
ReplyDeleteBrad points out an important point, once Sweden reaches their goal, what can they do to further it? Continue the negative interest rate trend? Also, in class we were reminded that in many cases, the answer to mitigate a lot of the impact from shocks to either the money market or goods market is done by many countries through the lowering of interest rates. Given Sweden's already negative rates, if such a shock were to hit their economy, how would they weaken the shocks impact?
ReplyDeleteThis is a really interesting article because we have not talked about negative interest rates in our classroom. It is impressive to see that It is working for Sweden. I would like to know what would happen once they do reach the level of inflation they want.
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