Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2020:15: Lessons from the Swedish Experience with Negative Central Bank Rates

Fredrik N.G. Andersson () and Lars Jonung ()
Additional contact information
Fredrik N.G. Andersson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Lars Jonung: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: Negative interest rates were once seen as impossible outside the realm of economic theory. However, several central banks have recently adopted negative policy rates. The Federal Reserve is coming under increasing pressure to follow suit in the wake of the coronavirus crisis. This paper investigates the actual effects of negative interest rates using the Swedish experience from 2015 to 2019. The Swedish Riksbank was one of the first central banks to introduce a negative interest rate in 2015 and the first central bank to abandon a negative rate in 2019. We find that negative rates had a modest effect on consumer price inflation due to globalization, but significant effects on the exchange rate and domestic asset prices, thus fostering financial imbalances. We conclude by discussing the implications of our results for larger economies such as the United States.

Keywords: Monetary policy; inflation targeting; Sweden; United States; negative interest rates; forward guidance; quantitative easing

JEL-codes: D78; E40; E43; E47; E50; E52; E65

20 pages, August 17, 2020

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