Prof. Anand S

We know that lenders or investors earn interest for giving money, and borrowers pay for using the money. This principle is well understood and has stood the test of time. However, in a few countries in Europe and Japan, advanced economies at that, interest rates have been set below zero. This bold monetary experiment implies that savings lose value, and borrowers get paid to take a loan.

The idea → How to get banks to put their money to work?

• Central Bankers want to make interest rates on savings negative so that people won't hoard money.
• They want to lower lending rates ⬇️ too so that people borrow more ⬆️
• If you charge people to save money (that's the effect of a negative interest rate), they will take it out of banks and store it under a mattress 🛏️

What can a Central Banker do ❓

• Don't make the consumer interest rates negative.
• Instead, focus on the big players like banks with so much money that wouldn't fit even in vaults.
• Banks will have to pay to keep their money in an electronic form with the Central bank.
• The Central bank pays interest typically to banks on the reserves it keeps. It could charge them instead!
• Banks could end up paying a lot of money that they could go broke.
• Make the banks pay a high rate only on a tiny portion of their reserves. They pay little or nothing on the remainder, making the charges affordable.
• Thus banks will happily lend that earn a little more than the Central Bank's worst rate on their deposits.
• These low rates should induce companies to borrow, invest, and hire.