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Since the Great Financial Crisis (GFC) Monetary Policy has become increasingly “unconventional,” across the globe. Instead of simply managing interest rates, various central banks have adopted: large scale asset purchases; explicit forward guidance on short rates; and at least in Europe adopting “negative” interest rates that penalize banks for holding excess reserves. With the current Covid crisis, central banks have gone even further into unconventional territory although interestingly, in Europe interest rates have not become more negative. Sweden has even raised rates back to zero. There is an active debate around the efficacy of negative interest rates in terms of stimulating the economy. Recently Fed Chair Powell gave a speech that said the Fed did not consider negative rates appropriate for the United States although he also said one could never rule them out. In this paper I explore the pros and cons of negative interest rates as an effective policy tool. The circumstances under which they are most effective, but also why they may be counterproductive. I start by discussing the role of interest rates in the economy and the different types of interest rates. I then define what we mean by negative interest rates. We then discuss negative rates in practice. How and where they have been implemented. I provide a critique for why they may not be effective. In the literature review we discuss Gesell, a proponent of negative rates and Keynes whose theory of interest rates highlighted the importance of fiscal policy rather than monetary policy. I conclude with a policy section that discusses current economic policies and the concern as to whether or not they will be successful.
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Konstam, Olivia S., "Are Negative Interest Rates an Effective Policy Tool?" (2020). Senior Projects Spring 2020. 63.
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