Most of us are probably used to the notion that interest rates are usually positive and it is uncommon to face negative nominal interest rates. While true in general, it does happen to be the case that from time to time the level of short term rates goes below zero.
In this activity we would like you to think about this phenomenon. To begin, we would like you to read the following research papers and newspaper articles:
‘The Economics of Negative Interest Rates’ LSE Business Review, Blog, May 2019
‘The Signalling Channel of Negative Interest Rates’ by Oliver de Groot and Alexander Haas, Working Paper (2018)
‘Negative interest rates: Lessons from the Euro Area’ by J. Eisenschmidt and F. Smets, Working Paper (2018)
‘Get Ready For Negative Interest Rates When Next Recession Hits’ by Pedro Nicolaci da Costa, Forbes, February 2019
‘The World Better Get Used to Negative Rates’ by Satyajit Das, Bloomberg Opinions, March 2019
‘Cashing In: How to Make Negative Interest Rates Work’ by Ruchir Agarwal and Signe Krogstrup, IMF Blog, February 2019
‘Looking for the Positives In Negative Interest Rates’ by Brian Reinbold and Yi Wen, Monetary Policy (Q4, 2017)
You are also expected to refer to additional sources and articles that are related to the topic of negative interest rates.
We would like you to write an essay in which you discuss negative interest rates, their implications and consequences in the light of various theories of interest rates and from a practical perspective. Specifically, please address in your essay the following topics and questions:
Explain intuitively what it means when interest rates are negative and describe specific examples of countries that have experienced interest rates below zero.
Discuss how different theories of interest rates help us to explain the negative sign on interest rates and describe the theoretical implications of such rates for the future.
Describe broadly the consequences of interest rates being negative from a practical perspective for various market participants, such as: governments, companies, financial institutions, institutional and individual investors. Consider also the both negative and positive aspects of this situation.
Imagine that negative short term rates are persistent in economy for a period of time longer than two to three years. Describe how, in your opinion, this situation could influence the investment decisions of small individual investors.
Key Specifications and Requirements
You may refer to any of the materials and tools introduced on the course but must:
Present data in a clear and precise manner
Set your work out as an essay; including an abstract and a well structured conclusion
Demonstrate an ability to find information and research different sources of information, selecting the most informative pieces of information relevant to your topic
Label any diagrams used (eg. Figure One), give the diagram a title and credit the source
Make use of graphs and charts to support your analysis
Use Harvard referencing appropriately and accurately
Write 2000 words (+/-10%) and include a word count at the end of the assessment. Note that equations, tables, titles, references are not included in the word limit
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