Ahmet Murat Alper

Ahmet Murat Alper is a Central Bank Specialist at the CBRT.

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After the global financial crisis, the foremost central banks started to introduce some unconventional monetary policies one after another: monetary expansion, forward guidance and eventually negative interest rates (NIR). Interest rates below zero not only mean that banks get no interest for their deposits at central banks but also that they bear a certain cost. So, under these circumstances, banks are expected to distribute these sources as credit and stir up economic activity.

As Sidney Homer and Richard Sylla highlighted in their book A History of Interest Rates, there has never been a time in the last 5,000 years of humankind that interest rates went below zero, until recently. However, according to an analysis conducted by the global rating agency Fitch, the amount of government bonds trading at negative yields is slightly above USD 9 trillion.

Negative yield is a state where investors consent to receive less money at the end of the maturity than they put in at the beginning. So, why would an investor, who would not incur any loss if he keeps the money in cash, agree to have negative yield? Even if it looks irrational at first sight, the answer is simple: Transferring and storing cash is difficult, costly and risky.

Academic discussions started hundred years ago…

Even if the term “NIR” is quite new, its origins date back a hundred years. The mastermind of the concept was German economist Silvio Gesell, who proposed in the early 20th century that cash was for exchange of goods only and therefore the money that was not spent but held in cash should be taxed. Gesell’s ideas were only appreciated by Fisher and Keynes and were soon forgotten, until they were re-remembered in Marvin Goodfriend’s study in 2000. One of Goodfriend’s proposals for overcoming the zero lower bound on interest rates was the “carry tax”. Goodfriend proposed imbedding a magnetic strip in each bill to detect the time the bill was held in cash and deducting carry tax according to this carry period. In 2009, in his article in the New York Times, Mankiw proposed that the Fed should bring interest rates below zero to evoke loans.

The Riksbank was the first to introduce NIR…

As debate raged over whether central banks can lower policy rates below zero, a surprising move came from the world’s oldest central bank, the Riksbank of Sweden, in July 2009. On the grounds of the deep economic downturn in the country, the Riksbank decided to lower the interest rates it applied to deposits that commercial banks kept at the central bank below zero. Thus, the Riksbank became the first country to apply NIR. This move terminated discussions over the applicability of NIR and the door to the NIR territory was wide open.

The second move came from another Scandinavian country, Denmark. Danmarks Nationalbank, the country’s central bank, reduced deposit rates to negative territory in July 2012 to keep under control the international capital inflows to their country, which was regarded as safe-haven for capital flows, and to prevent appreciation of the Danish currency. Nevertheless, none of the implementations lasted long. Sweden waived the NIR policy in September 2010 and Denmark in April 2014.

In 2014, the number of central banks that adopted NIR increased. Sweden reverted to NIR in July and Denmark in September. In June 2014, the European Central Bank introduced NIR to revive economic activity and drive inflation expectations while the Swiss National Bank introduced NIR to control international capital inflows and to prevent over-appreciation of the currency. Japan and Hungary introduced NIR in February 2016 and March 2016, respectively, to establish price stability. Today, the number of central banks implementing NIR is six and the share of these economies applying NIR in global output is almost 25 percent.

When country experiences are analyzed, it is observed that central banks cut deposit interest rates below zero for two main reasons:

  • To prevent over-appreciation of national currencies due to international capital inflows,
  • To revive economic activity and push inflation expectations

Losing ground…

Denmark and Switzerland were more successful in achieving the first goal; while other economies who targeted the second goal are yet to have reached the desired success.

Actually, the NIR implementation has had adverse implications for the banking sector particularly. Banks bear the burden of the NIR for fear that customers would withdraw their money and choose to keep their money under the mattress in case the banks reflected the impacts of the NIR to customers. Actually, in a news article in the Financial Times, it was stated that this cost had reached euro 2.64 trillion.

Insurance companies and pension funds, which have to opt for longer-term assets with fixed income because of their business models, are not doing very well.  The extremely low global interest rates are undermining the financial structure of these companies. According to an IMF report, alarm bells are ringing for many insurance companies and pension funds that are having a hard time making enough returns to meet their liabilities. Meanwhile, individuals, who are disappointed by pension funds, feel an urge to make additional savings and further cut their consumption. Negative returns impel investors to seek higher returns and drive them towards more risky assets, which in turn leads to a surge in asset prices.

The macroeconomic variables in countries implementing NIR are not so promising. In the IMF’s latest report evaluating the global economy, it is pointed that the growth is still subdued, and inflation is still low. In his article in The Guardian, Nobel laureate and economist Joseph Stiglitz stated that contrary to expectations, some lending rates have increased in countries implementing NIR. It was also understood that increasing lending facilities alone fell short of increasing loans. For instance, in an IMF report evaluating the euro area, it was stated that although credit growth turned positive, it is still very weak.

Concerns have increased…

All these adversities have fueled concerns over NIR that was regarded as a life-saver at the beginning. It is observed that some central banks are watching for an opportunity to exit this implementation. Actually, three out of six members of the Riksbank entered reservations against the decision to extend the purchases of government bonds. The program could only be extended with the Governor’s vote. The markets interpreted the latest decision of the European Central Bank as meaning it would terminate bond purchases. The last monetary policy decision of the Bank of Japan was interpreted that the Bank’s next policy move will not be cutting rates but raising rates.

Can it influence emerging economies?

There are not many studies on this issue. In a report issued by the World Bank, it is stated that NIR applied in Europe can affect emerging economies through real and financial channels. It is noted that exchange rate movements between the US dollar and the euro may affect export dynamics, but these effects will remain low. Moreover, departing from the likelihood of capital outflows from countries implementing NIR, emerging economies are expected to be positively affected. However, in another analysis by the World Bank, it is stated that emerging economies cannot benefit much from this positive environment due to their intrinsic fragilities.

To conclude, the NIR implementation, which stands out as the most extraordinary example of unconventional policies, is far from generating the expected results in advanced economies and its positive impacts have remained limited in emerging economies.



Arteta, C., Köse, M.A., Stocker, M. and Taşkın, T., (2016), Negative Interest Rate Policies: Sources and Implications, World Bank, Policy Research Working Paper No. 7791.

European Central Bank, (2016), Monetary Policy Decisions, 8 December 2016.

Goodfriend, M., (2000), Overcoming the Zero Bound on Interest Rate Policy, Federal Reserve Bank of Richmond, Working Paper No. 00-03.

Fitch, (2016), Negative-Yielding Debt Falls Sharply Post Election, 1 December 2016.

Homer, S. and Sylla, R., (2005), A History of Interest Rates, Wiley Finance.

IMF, (2016), Euro Area Policies, Country Report No. 16/219.

IMF, (2016), Global Financial Stability Report: Fostering Stability in a Low Growth, Low-Rate Era, October 2016.

IMF, (2016), World Economic Outlook: Subdued Demand, Symptoms and Remedies, October 2016.

Riksbank, (2016), Further Purchases of Government Bonds for SEK 30 billion, Repo Rate Unchanged at -0.50 per cent, 21 December 2016.

Bank of Japan, (2016), Statement on Monetary Policy, 20 December 2016.

Jones, C. and Shotter, J., (2016),  Banks Look for Cheap Way to Store Cash Piles as Rates Go Negative, Financial Times, 16 August 2016.

Mankiw, G., (2009), It May Be Time for the Fed to Go Negative, The New York Times, 19 April 2009.

Stiglitz, J., (2016), The Problem with Negative Interest Rates, The Guardian, 18 April 2016.

World Bank, (2015), Global Economic Prospects: The Global Economy in Transition, June 2015.

Ahmet Murat Alper

Ahmet Murat Alper is a Central Bank Specialist at the CBRT.

Note To Editor
For views, suggestions
and comments:
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* The views expressed here are those of the authors. They do not necessarily reflect the official views of the Central Bank of the Republic of Türkiye.