Negative interest rates: How do they work? Case studies in Japan, Europe, Switzerland, Sweden, and Denmark

Abstract

This paper will focus on the impacts of negative interest rate implementations in five areas. To this day, there have only been a handful of areas that have had their central banks lower the interbank interest rate to below zero, thus breaking through the zero‐lower bound theory in economics. The areas studied here are Japan, Switzerland, Europe, Denmark, and Sweden. All but Japan lowered the interest rates below zero on reserve funds in their respective central banks while Japan lowered the rate only for the amounts excess of reserves. The goal of this survey article is to explain why these areas decided to implement such an unorthodox policy and determine what implications these policies have on the general economy of the area and the banks within.

Systemic risk measures and regulatory challenges

“…With most systemic risk measures being created and empirically tested during positive interest rate environments, they may not be effective in a negative interest rate scenario. Moreover, negative interest rate environments have broader implications on banking models and levels of liquidity (Demiralpa et al 2021;Gilman, 2021), which directly relate to risk, thus will be captured in a range of other systemic risk measures.…”

Analysis of Negative Interest Rate Policies and Their Impact on Global Financial Markets – A Review of Relevant Literature

“…On the contrary, Villanueva (2021) found there was no statistical significance of negative interest rates on GDP. Expanding on the base knowledge of negative interest rates Gilman (2021) discusses what negative interest rates are and illustrating that NIRP in fact do a good job at easing the economy. It also goes into the specificities of each of the numerous countries that have already implemented negative interest rates and how their policies have helped, Gilman (2021), has a different view from some of the other literature that has been mentioned in regard to how Japan has dealt with their implementation of NIRP.…”

“…Expanding on the base knowledge of negative interest rates Gilman (2021) discusses what negative interest rates are and illustrating that NIRP in fact do a good job at easing the economy. It also goes into the specificities of each of the numerous countries that have already implemented negative interest rates and how their policies have helped, Gilman (2021), has a different view from some of the other literature that has been mentioned in regard to how Japan has dealt with their implementation of NIRP. Gilman mentions the worrying trend that when Japan implemented their NIRP they did not apply the policy to reserve funds, however in the paper there was no solution or alternative to what Japan should have and can do as Gilman (2021), did mention that there needs to be further research into the long term effects of this policy on Japanese reserve funds.…”

“…It also goes into the specificities of each of the numerous countries that have already implemented negative interest rates and how their policies have helped, Gilman (2021), has a different view from some of the other literature that has been mentioned in regard to how Japan has dealt with their implementation of NIRP. Gilman mentions the worrying trend that when Japan implemented their NIRP they did not apply the policy to reserve funds, however in the paper there was no solution or alternative to what Japan should have and can do as Gilman (2021), did mention that there needs to be further research into the long term effects of this policy on Japanese reserve funds. Angrick and Nemoto (2017), made analyses of the implementation of negative interest rates across Europe and in Japan, they mention that a primary proponent for implementing negative interest rates is to address the deflationary trends and the continued decline in the strength of the economy as well as discourage foreign capital inflow.…”