Economics Asked by proskor on April 8, 2021
The European Central Bank (ECB) has been lowering the interest rate on its deposit facility, first to -0.1% in June 2014, then to -0.2% in September and eventually to -0.3% in December 2015.
But what difference does it make whether it is -0.1% or -0.3%, as long as it is negative? I would expect anyone to withdraw all their money immediately as soon as the interest rate gets negative, for you would always be better off just keeping it for yourself, even if the interest rate is just -0.0001%.
I do understand the intention of the ECB, but I do not understand why lowering the already negative interest rate further should make it more effective.
You are assuming that the supply of deposits is zero when the price (the rate) is zero but it definitely is not. There are several reasons for this.
And, in the case of the EMU / ECB / Euro, that may well be what happened. Inflation fell for the five months after June 2014, which may explain why nominal rates had to fall: to keep the tightness of monetary policy unchanged or at least to keep real rates unchanged.
Correct answer by BKay on April 8, 2021
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