Last updated: 10:06 / Wednesday, 27 July 2016
NCPA´s David Ranson

Are Negative Interest Rates Positive?

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Are Negative Interest Rates Positive?
  • "Financial markets cannot operate efficiently unless rates are in line with expected inflation and, at times, deflation"
  • While there are mental, cultural and institutional barriers to negative interest rates, there are no economic barriers to negative interest rates

Negative interest rates– though unsettling for many – can actually be an economic boon, according to a new study by National Center for Policy Analysis  (NCPA) Senior Fellow David Ranson.

“Low interest rates are not in themselves bad for the economy. Indeed, the same can be said of high interest rates; financial markets cannot operate efficiently unless rates are in line with expected inflation and, at times, deflation,” says Ranson.

The study points to Switzerland as an example of naturally negative interest rates. “To their own surprise, the Swiss accomplished it by maintaining an exceptionally strong currency, now roughly at par with the dollar.  Life went on,” writes Ranson. “The Swiss currency has long been one of the strongest anywhere, and inflation has been low and sometimes negative for years. It is negative right now, but it is mostly market forces that drove Swiss nominal interest rates below zero. Indeed, in these hitherto rare cases where prices are consistently on the decline, it is natural for nominal rates to be negative.”

While there are mental, cultural and institutional barriers to negative interest rates, there are no economic barriers to negative interest rates, adds Ranson. “However inconsistent it may seem at first, there is no inherent conflict between opposing the Fed’s former zero interest-rate policy and cautiously welcoming negative interest rates, in the event that deflationary conditions last.”

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The National Center for Policy Analysis (NCPA) is a nonprofit, nonpartisan public policy research organization, established in 1983 that brings together bright minds to tackle the country's most difficult public policy problems — in health care, taxes, retirement, education, energy and the environment.

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