how do negative interest rates work?
In: Economics
I mean, exactly how you would expect. The lender pays the borrower for borrowing money.
The only entity that would conceivably go along with negative nominal interest rates is a central bank that wants to stimulate lending so badly it actually pays banks to borrow from it.
Sometimes other entities might offer negative real (i.e. post-inflation) interest rates. In a high inflation environment (say, 10% inflation), it would be really worthwhile to lend money at 9% interest rather than do nothing. Effectively you lose 1% of your value rather than 10%.
Well if you have a loan you recieve the interest instead of paying the interest, if you have savings, you pay interest over it instead of getting interest.
And it is basically a last ditch attempt to prevent a recession. In harsh economic times, people and businesses tend to hold on to their cash while they wait for the economy to improve. But this behavior can weaken the economy further, as a lack of spending causes further job losses, lowers profits, and reinforces people’s fears, giving them even more incentive to hoard.
So negative interest give you an incentive to spend money and strenghten the economy.
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