money

The Positive Side of Negative Interest Rates

The idea that one thousand dollars to be received a year from now could be worth more than one thousand dollars in the bag today is counter to common intuition. A present dollar has a different value than a future dollar. When inflation is sufficiently high, a future dollar is almost worthless. But by the same logic, when prices are consistently falling, a future dollar could be more valuable than a present dollar. Low interest rates have adverse economic consequences to the extent that they are imposed on a credit market which would have reached its own equilibrium at a higher rate. But while difficult to adapt institutionally, low rates are not in themselves bad for the economy. Indeed, the same can be said of high interest rates; financial markets cannot operate efficiently unless rates are in line with expected inflation and, at times, deflation.

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