Negative Rates Lose Out to Zero Cost of Money in Opening Wallets
(Bloomberg) -- Zero interest rates can be a more effective tool for central banks to get individuals borrowing and making riskier investments than when the cost of money turns negative, according to a new study from a trio of researchers with Israel’s Ben-Gurion University.
Published in the Journal of Behavioral and Experimental Economics, the study is the first such examination of the behavioral impact of negative rates, according to co-author Lior David-Pur, who also heads the debt management unit in Israel’s Ministry of Finance. “Central banks should consider carefully before decreasing rates below zero,” he said in an interview.
The finding may give monetary policy makers around the world pause as they consider further cuts to borrowing costs in an attempt to stimulate economies during the global slowdown brought on by the Covid-19 pandemic.
Among the findings in the report were that cutting rates from 1% to 0% had the greatest impact on boosting risk-taking and borrowing, while a reduction below zero could actually have the opposite effect, with leverage decreasing.
David-Pur attributed the results to a couple of factors: the psychological importance of 0%, and the fact that negative interest rates -- where individuals are paid by banks to borrow money -- could spur risk aversion.
A long-running debate has played out during the past few years over the efficacy of negative rates, amid slowing growth and weak inflation. A handful of central banks including the European Central Bank reduced their key rate below zero, with Sweden’s Riksbank lifting rates back to zero. Fed funds futures also price in a chance of a negative policy rate from around mid-2021, despite continued push-back from U.S. central bankers.
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