Debating the Usefulness of Negative Interest Rates

The video discusses the concept of negative nominal interest rates and how central banks can implement them to manage economic downturns. It explains the mechanism of creating excess reserves and the impact on interbank rates. The challenges faced by banks and depositors, such as financial repression and cash holding, are also addressed. Potential solutions like flexible exchange rates are proposed to mitigate these challenges.

What is one reason central banks are limited in their ability to lower interest rates during economic downturns?

• Rising unemployment rates

• Falling natural rates of interest

• High inflation rates

• Increased government spending

How do central banks influence interbank interest rates using excess reserves?

• By reducing bank lending

• By printing more currency

• By adjusting the interest on reserves

• By increasing government bonds

Why might banks be reluctant to pass negative interest rates onto retail depositors?

• Government regulations

• High operational costs

• Lack of competition

• Fear of losing customers

What is a potential impact of financial repression caused by negative interest rates?

• Decreased inflation

• Higher bank profits

• Slowing of economic demand

• Increased consumer spending

What might depositors do if negative interest rates are imposed on them?

• Invest in stocks

• Hold more cash

• Buy government bonds

• Increase savings

What is one suggested solution to prevent a run on cash due to negative interest rates?

• Increase interest rates

• Flexible exchange rate for currency

• Limit cash withdrawals

• Introduce new currency

What historical pattern is observed in the US during recessions regarding short-term and long-term interest rates?

• Both rates remain constant

• Long-term rates fall below short-term rates

• Short-term rates fall below long-term rates

• Short-term rates exceed long-term rates