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How Negative Interest Rates Actually Work
Description
Episode 58 of Monetary Policy Explained digs into negative interest rate policy (NIRP), a controversial tool used by the European Central Bank, the Bank of Japan, and others. Lucas and Luna walk through the mechanics: how charging banks on excess reserves is supposed to stimulate lending, why it creates strange incentives, and what the evidence says after nearly a decade of real-world testing. They look at the European Central Bank's tiered system implemented in 2019 to protect bank profitability, and they discuss why negative rates haven't spread to the United States. Specific examples include Denmark's mortgage market, where rates briefly went negative for homeowners, and the impact on money market funds. The episode also explores the limits of the tool, including the 'reversal rate' theory and what happens when banks pass costs to depositors. A focused, concrete look at one of the most debated central bank experiments of the 21st century.