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

• Published date: 01 April 2021
• Author: Jacquelyne Gilman
• Date: 01 April 2021
• DOI: http://doi.org/10.1002/jcaf.22490

Received: 6 December 2020Revised: 10 January 2021Accepted: 14January 2021

DOI: 10.1002/jcaf.22490

COLUMNS

Negative interest rates: How do they work? Case studies in

Japan, Europe, Switzerland, Sweden, and Denmark

Jacquelyne Gilman

Department of Accounting, CUNY

Brooklyn College, Brooklyn, New York,

USA

Correspondence

JacquelyneGilman, Department of

Accounting,CUNY Brooklyn College,

2900Bedford Ave, Brooklyn, NY 11210-

2889,USA.

Email:jacquelyne.gilman@gmail.com

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 break-

ing 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.

KEYWORDS

interest rates, international, negative, NIRP

1INTRODUCTION: WHAT ARE

NEGATIVE INTEREST RATES?

Interest rates have been steadily falling since the begin-

ning of the 21st century (Ziegler-Hasiba & Turnes, 2018,

p. 104). Negative interest rates are a novel and interesting

topic because the basic principles of economics claim that

interest rates on investmentscannot go below zero because

the investor may as well just hold cash at that point. This

is known as the zero-lower bound. Holding currency is of

course, not without risk though as they can lost, stolen, or

damaged.

To put it simply, negative interest rate means that banks

will charge you interest instead of paying you interest, for

keeping your money with them. These negative interest

rates effect only bank loans and bank deposits between a

bank and the central bank. For clarity, the negative inter-

est rate does not apply to household deposits with a bank,

which are subject to the zero lower bound interest rate,

whereas interbank deposits are seemingly not subject to

the zero lower bound interest rate. The reason that house-

hold deposits are not targeted by the negative interest rate

seems to be because households do not have a huge need

for storing their cash in the bank, not like other banks

need to anyway, and this creates a problem in that if the

bank were to implement negative interest rates on aver-

age people, it would see a huge decrease in deposits since

the average person can simply hold cash. A bank on the

other hand, does not have the capacity to just hold cash

like that and thus has to either store it with the central

bank (where there are negative interest rates)or lend it out

(Eisenschmidt & Smets, 2019, p. 14).

This strategy, of employing negative interest rates, is

actually quite new.The first time I was seen was in Sweden

in 2009. The reason banks even began implementing this

unconventional policy is because after the 2008 financial

crisis, central banks dropped their interest rates to near

zero and were unable to provide any more economic

easing to help the economic situation (Černohorská &

Kubicová, 2020, p. 30). The purpose of this move is usually

to stimulate the economy. In fear of deflation, central

banks can lower their interest rates into the negatives to

encourage other banks that store their money in excess

of reserves with the central bank, to lend it out more to

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