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NEGATIVE INTEREST RATE: THE NEW NORMAL

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Whenyoulendsomebodymoney,theyusually havetopayyoufortheprivilege.That has beenabedrockassumptionoffinancial institutionsforcenturies.Butthisisan assumption that is increasingly being tossed aside by some of the world’s central banks and bond markets. In recent months a number of the world’scentralbankshaveveeredinto territory once unimaginable to most economists: negative interest rates. Investopedia says negativeinterestratepolicyisan unconventionalmonetarypolicytoolwhereby nominaltargetinterestratesaresetwith a negativevalue,belowthetheoreticallower boundofzeropercent. Standardtextbook theoriesholdthatnegativeinterestratesare infeasiblebecausedepositorsalwayshavethe outsideoptionofholdingontocash,whichis storableandthereforepaysaneffective interest rate of zero. Duringdeflationary periods, people and businesses tend to hoard money instead of spending and investing. The result is a collapse in aggregate demand which leads to prices falling even further.

Adownwardshiftinaggregate dema…