Negative Nominal Interest Rates
Modeled Behavior submits:
By Karl SmithTyler Cowen says
If currency disappeared, how might negative nominal interest rates come about? The market won’t do it automatically. Let’s say we start with zero price inflation and the real rate of return goes negative. Competitive banks won’t impose negative nominal rates, rather the equilibrium is that they stop further real investments and pay zero on the balances. One constraint is that some form of withdrawals may always be possible, the more important constraint is simply that “storing balances” costs almost nothing at the margin and so competition will bring a zero rather than negative nominal return, adjusting for costs of transacting of course.
Think of the action as moving through the bond market. Suppose currently the central bank wanted to keep buying Treasuries until the interest rate went negative. This would be difficult though not impossible. Once the yield went even a bit negative banksComplete Story »
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