Some economists believe that a negative interest rate policy will stimulate the economy by reducing the cost of loans. That isn’t how it has worked in practice.
by Simon Constable
Reason.com
The Federal Reserve Bank of St. Louis just published a paper suggesting the Federal Reserve should use negative interest rates to buoy the economy in the wake of the COVID-19 lockdowns. But negative interest rates have never worked before, and it’s foolish to expect them to work now.
In normal times, you expect to receive interest income on a bank deposit. That lets your savings grow. Negative interest rates turn that idea on its head. With an annual interest rate of -1 percent, for example, if you deposit $100 in the bank, a year later your savings will have shrunk to $99.
Some economists believe that a negative interest rate policy will stimulate the economy by reducing the cost of loans, thus making it easier for businesses to grow. That isn’t how it has worked in practice.