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Is ther anything stopping nominal interest rates being negative?

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  • 02-11-2008 2:02am
    #1
    gerry87
    Registered Users Posts: 871 ✭✭✭


    Is there anything that binds nominal interest rates to be positive? If there isn't, what sort of scenario could it happen under?


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    #2
    nesf
    Registered Users Posts: 27,645 ✭✭✭✭nesf


    Eh, maybe I'm reading it wrong but a negative nominal interest rate would mean that the bank would essentially be giving you free money. Borrow 1K from us and you only have to pay us bank 900 euro and similar.


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    #3
    SuperSean11
    Registered Users Posts: 1,555 ✭✭✭SuperSean11


    I might be wrong but i think he means the rate of inflation.


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    #4
    nesf
    Registered Users Posts: 27,645 ✭✭✭✭nesf


    SuperSean11 wrote: »
    I might be wrong but i think he means the rate of inflation.

    Or the real interest rate.


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    #5
    gerry87
    Registered Users Posts: 871 ✭✭✭gerry87


    No, i mean nominal interest rate. Its a bit of a silly question, but i mean purely theoretically, what assumptions would have to be imposed on the world to allow it.

    Say for example,
    1. People weren't able to hold cash (crime rates are so high its almost guaranteed to be stolen).
    2. The worlds falling apart and stock market and other investment returns are big and negative.

    In this case, couldn't the bank could offer a negative interest rate on deposits? i.e. We guarantee, if you deposit with us, you'll only loose 3%, instead of the potential 50% loss from the stock market or 100% loss from it being stolen. Are there any more realistic ways?

    I see what you mean nesf about the borrowing rate, it might be bound. Or is there a way it could go negative?


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    #6
    Économiste Monétaire
    Closed Accounts Posts: 2,208 ✭✭✭Économiste Monétaire


    The NCB would effectively be paying you to take out money, with a negative nominal interest rate. The problem still lies if banks will lend that money and restart a the credit cycle, e.g. Japan. I've never heard of a negative nominal interest rate, I could only see it happen in a large deflationary period where real interest rates are quite high, even when the NCB rates were zero.


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    #7
    ArmaniJeanss
    Registered Users Posts: 13,362 ✭✭✭✭ArmaniJeanss


    Japanese Yen November 98.
    In a further damaging sign of the extent of Japan's economic woes overseas banks such as Barclays Capital and JP Morgan have begun to charge negative nominal interest rates to Japanese banks for holding yen deposits.

    http://money.cnn.com/1998/11/06/economy/japan_bank/

    Swiss Franc 1970s.
    During the 1970s, Switzerland offered negative interest rates, but only to foreigners. This weirdness emerged because of significant speculative interest in owning Swiss francs, on which the foreign investors expected to make so much money that they were willing to pay for the privilege of holding the currency. Economists note the complexity of this example and typically treat it as a special case that does not break existing models
    http://everything2.com/index.pl?node_id=1375475


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