Negative interest rates

Abstract

Following the financial crisis of 2008, several central banks have experimented by setting negative policy rates. In this master thesis, we want to examine the effect of negative interest rates on the Swedish economy. Sweden has since 2015 had policy rates below zero, which has raised many interesting questions. We are particularly interested in whether negative interest rates are expansionary. To answer this, we look at the general development in the Swedish economy and compare this to the economic developments of other countries adapting to negative interest rates. We find that Sweden have over the last years experienced positive developments in its economy, with raising inflation, decreasing unemployment and increased output. To examine if this is due to monetary policy shocks or not, we establish two empirical SVAR-models. One model examining monetary policy when policy rates are positive and the other when policy rates are negative. By simulating an expansionary monetary policy shock, we find that the Cholesky model using data when policy rates where positive show overall expansionary effects, which is in line with SVAR literature. On the other side, our Cholesky model using data after policy rates became negative shows contractionary effects on industrial production and no effect on CPI. However, on impact real effective exchange rate depreciates more under negative policy rates, than under positive policy rates. This lead us to conclude that the major driver for the economic developments in Sweden has been other factors than monetary policy alone. Hence, at least for the case for Sweden are irrelevant or even contractionary.