Question

Explain why in recent years central banks in numerous developed countries have resorted to a near -zero interest rates or negative interest rate . Make sure to explain what is meant by negative interest rate policy . Which are macroeconomic consequences of such a policy ? Explain.

Answer 1

Explain why in recent years central banks in numerous developed countries have resorted to a near -zero interest rates or negative interest rate. Make sure to explain what is meant by negative interest rate policy

The Central Bank is often called as the banker’s bank as it lends to the financial Banks which are present in the economy. A negative interest rate or a near zero interest rate is the categorization of a developed economy and has become a recent trend over the years.

In most developed countries, the inflation rate is relatively lower and therefore the Central Bank tries and have a strategy in which this can be hiked so that the economy can progress.

Lower interest rates mean that the countries financial banks can lend at a relatively lower rate to individuals and corporations which use this money as an active source of capital to fund their needs.

These companies help in generation of capital and innovation and serve as building blocks of most countries’ economies. The reason why these countries such as the United States, Denmark or Switzerland and some other Eurozone ones is that they see higher economic activity backed by lower interest rates respectively.

What is a negative interest rate policy? Which are macroeconomic consequences of such a policy? Explain.

A negative interest rate refers to the rate which the central bank of the country provides to the bank for parking their money with the bank. A negative one highlights that the central bank charges these banks, for keeping their money in the central bank.

While this might sound odd since banks must also earn interests on their deposits, this is done keeping interest rates in mind and also making sure that inflation does not decline.

It is a reactive strategy used to ensure that the macroeconomics of the countries are not destabilized. This means that the countries ensure that their level of economic activity is stable and corporations get loans at a relatively lower rate respectively.

Therefore the main aim of having such a strategy is to stimulate economic growth respectively.

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