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- August 1, 2016; Vol. 3, Number 8

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Less Than Zero: The world experiments with negative interest rates

by Paul Walker

As of mid-July 2016, six central banks in Europe and Asia have adopted negative interest rates in an effort to stimulate their national economies. The experiment began in Denmark in 2012, but the big step came in June 2014, when the European Central Bank dropped its benchmark rate below zero. Sweden and Switzerland soon followed, and Japan and Hungary went negative in early 2016. Taken together, these economies represent about one-fourth of global economic output.

Although the Federal Reserve remains committed to raising the federal funds target rate, the Fed is watching the efforts of foreign central banks, with an eye toward expanding its tools in the event of an economic downturn. On a more immediate level, the overseas experiment is affecting the dollar and helping to suppress interest rates in the United States.

REVERSE ECONOMICS

Central banks lower interest rates for two fundamental reasons: (1) to encourage business investing and

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