Thread by @Bacc_investor93

Negative rates (NR) are contractionary. There are two types of rates that CB could reduce to below zero.
- the policy rate (rate at which CB lends to banks against good collateral)
- interest rate on excess reserves (the rate CB pays on reserves parked by banks at the CB)
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let's focus on the latter. NR on excess reserves can be thought of as a safe deposit charge, that is a tax on deposits. The burden of this tax will fall either on depositors or on borrowers. If interest rates are reduced too much and
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and hold at those levels for a long period of time, banks net margins will be squeezed, and since NR are implemented in bad times, this could lead banks to impose NR on deposits and/or raise lending rates in order to maintain their net margins
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In the first case we could have two effect
- posive: NR on deposits could induce a portfolio shift into other financial assets bringing about higher asset prices --> wealth effect (I'd not rely on this)
- negative: they are akin to a tax on depositors income so
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so this can decrease consumption spending and boost saving. But banks may not be willing to pass on their costs to depositors. Banks might bear the cost which will lower their profits. This leads to credit rationing, more severe credit crunch and
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unwillingness to lend to more risky and less profitable borrowers. This would undermine AD (aggregate demand) and make the economy worse.
In the second case, banks will charge customers for higher loan rates frustating the CB's attempt to stimulate investment via NR
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Another drawback of NR is turning bank reserves into a hot potato. Since banks are discouraged from holding excess reserves, will try to ged rid of them by passing them on to other banks. Banks that find themselves with
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with unwanted reserves might undertake not-so-smart investments or buy sovereign bonds. In EZ this could worsen the so-called "doom loop" between country sovereign risk and banks' sovereign bonds exposure.
The idea behind NR is the classical loanable fund theory
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by discouraging banks from holding reserves parked at the CB, banks will lend reserves out for a positive return, bringing about more investment and growth. Two problems (just to cut it short) arise out of this
1) banks cannot lent out reserves
2) banks lend if
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if the balance of risk of versus return on loan is positive for them. And naturally lending activity also depends on the demand for loans. Simply put, lending activity relies on AD expectations. Instead, for mainstream, classical macroeconomics the real interest rate is
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is the main macroeconomic price able to clear the loanable funds market --> full employment saving equal full employment investment. Keynes rejected the claim that interest rates are determined by supply (saving) and demand (investment). According to Keynes
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interest rates are determined by his liquidity preference theory. Plus, Keynes argued that output, not interest rates, adjusts to equalize AD and AS
Anyway, regardless of who would bear the cost of NR, firms will switch from equity finance to loan finance beacuse
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the latter is cheaper. They could borrow money to buyback shares or pay out dividends. In short, NR foster a debt-led asset price inflation growth model
Not really cool

There would still be a lot to say, also about negative policy rate. But this thread would be too long

The end