Thursday, March 3, 2011

Sweden and Negative Interest Rates

Today Matthew Yglesias is hyping Sweden's recent rosy economic data in a post titled "Unorthodox Monetary Policy Worked Nicely In Sweden; Will Anyone Notice?"

He's referring to the fact that in 2009 there was a wave of articles claiming that Sweden's central bank, the Riksbank, would be charging a negative interest rate on reserves held as cash at the central bank in an attempt to get banks to lend more.

As I noted yesterday, this idea is hogwash - banks don't lend their reserves to the public and interest on reserves doesn't have any direct effect on banks lending behavior. Indeed, the New York Times corrected the record on Carter Dougherty's economics blog just a few weeks after the initial erroneous reports in an article called "Negative Interest Rates in Sweden?"

The truth is, Sweden never charged banks a negative interest rate on overnight deposits; that's the significant interest rate on bank reserves. They actually paid a positive interest rate on reserves, just as most central banks now do.

Sweden's monetary policy was aggressive for sure! Proponents of more aggressive central bank policy would do well to learn about what the Riksbank actually did, and how it worked. There's a document called The Lower Limit of the Riksbank's Repo Rateavailable online that allows anyone to do just that.

But no one is helped when we try to do analysis based on hype instead of facts. Press reports often get technical details wrong; it pays to follow up with people who know what they are talking about.


  1. Uuh, I'm pretty sure that negative IOR on longer term debt is actually a lot more useful than on shorter term debt.

  2. "Uuh, I'm pretty sure that negative IOR on longer term debt is actually a lot more useful than on shorter term debt."

    okay, so i'm still working on getting the definitions nailed down here. since it is interest on reserves, doesn't it have actually nothing to do with actual debt, ie treasuries?

    of course, assuming that 'negative interest' is a sensible concept...

  3. @Jonny:

    Right, the actual policy resulted in a negative interest rate on one-week deposits, not overnight deposits.

    The point I'm making is to refute Yglesias' misconception that the Riksbank charged banks a penalty for holding reserves as cash. That did not happen.

  4. @studentee you're right, I shouldn't have said debt.

    @Raul, ok

  5. what is the usefulness of taxes on any particular savings instrument?

  6. @studentee

    So that you don't save. Saving is not a good thing to do when in depression like conditions, when you want to boost aggregate demand. Think of the paradox of thrift and the fact that one of the reasons of the crisis was the global savings glut (to quote Bernanke), massive worldwide savings that could only find attractive return in securitised debt.

  7. yes, but the key is the tax on a *particular* savings instrument. if you want to save, you will save. the markets will accommodate such a desire...

    i agree with everything else you've said, but there's no real practical way to tax every single thing that can be possibly construed as a savings vehicle. and a tax on a particular savings vehicle, even if switching costs are high, won't force the saver to lend. especially reserves, which don't get lent...

  8. studentee:

    This is true but the negative interest rate was never the intention of the Riksbank's policy; it just so happened that at the rate they set, there was SOME interest rate in their system that went into the negative.

    What happened, basically, was that Riksbank set an interest rate that someone realized would send a certain interest rate into negative territory. Someone probably mentioned that to a reporter as a little aside during an interview, and the reporter was like "Negative Interest Rate! Great story!"

    This is how misconceptions get propagated. This could be one of those Zombie Myths that continues to crop up over and over, which is why I'm trying to highlight it and explain the real situation.

  9. Raul, you have it exactly backwards. This supposed "myth" is not a myth at all. It's the New York Times's Economix blog - and you - who got it wrong, probably by relying on the reported words of some analyst who probably didn't know what he was talking about. The facts are right here on the Riksbank's website:

    Although you are right, of course, that banks do not lend out reserves.