What does economic theory tell us about the ability of central banks to sustain negative interest rates?
Negative interest rates, below zero are now occurring in the economies within Europe which has a significant effect because negative interest would be charged, instead of receiving money on deposits; depositors must pay regularly to keep their money with the bank. As economists has predicted that “it could not or at least should not happen” this emphasis the issues that the economies within Denmark and Switzerland is under threat as central banks lower the interest rates when the economies are struggling as a result of this the interest rates lowered towards -0.2% in September. (1)
Why are interest rates negative? Figure 1
One reason why interest rates are negative because The European Central Bank wanted to attempt to with negative rates before turning to a program with the involvement of bond-buying like those used in the U.S. and Japan economies. The use of negative interest rates has been occurring within Europe because countries such as Denmark, Sweden and Switzerland have used negative rates on the initial sale of bonds in early 2014. In the Eurozone, Denmark, Sweden and Switzerland have decided to have a negative rate on commercial banks' excess funds held on deposit at the central bank. Since the 1970’s Switzerland has moved its deposit rate below zero for the first time which shows that the country’s currency needs protecting. This is shown within Figure 1 because in June 2014 the first negative rate occurred within Europe’s Central Banks.
Furthermore the use of negative interest rates within Europe has developed to protect the economies of low inflation and to sustain the economic growth within the economies. The main objective of the Eurozone within 2014 is to stimulate economic growth and to raise inflation, which is also below zero and even further adrift of the European Central Bank's target of...