Hello All,
I have been trying to wrap my head around the idea of negative interest rates for sometime now. Intuitively, it seems as if you would be paying somebody to hold your money, obviously in simplest terms. Why/how do you arrive at a negative interest rate? What is the goal of negative interest rates (if there is even one). And what type of implication does this have on an economy's sovereign debt? Also any other anecdotal info would be appreciated.
http://www.marketwatch.com/story/negative-interes…
Thanks in advance!
Health of a country's economy is greatly dependent on Consumer Spending abilities of citizens in country. If there is not much consumer spending, then there is no movement of goods in market. That is there is no active business happening. Thus, to boost consumer spending , Central Banks try to reduce interest rates.
Reduced interest rates motivates people to take loans from banks and spending in economy increases. In countries like Japan, even reduced interest rates is not yielding any result as citizens are not responding to low interest rates.
So another option before Central Banks is to fix negative interest rates. This forces people to withdraw deposits from their bank accounts as the value of money decreases with negative interest rates. This leads to pumping money in market and thus helps in increasing consumer spending.
Hope this helped you
+1 SB
Your explanation definitely helped. Thanks!
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