Negative Interest Rates Keep Investors Away
June 10, 2020
The Jerusalem Post — A new BGU research study indicates risk-taking investors surprisingly prefer zero interest rates to negative rates when seeking to borrow money.
The BGU study shows that zero interest rates are considered more efficient than negative rates in terms of the impact on the willingness of individuals to borrow money and take risks.
Traditionally associated with stimulating spending during extreme financial crises, negative interest rates involve lenders actively paying borrowers to take out a loan.
“Where investors are concerned, moving from a zero-interest rate policy to a negative-interest rate policy might even have the opposite effect,” says Prof. Lior David-Pur, of BGU’s Department of Economics and the head of the Government Debt Management Unit in the Israeli Ministry of Finance.
Published in the Journal of Behavioral and Experimental Economics, the BGU study demonstrates that there is no statistical difference between the effect that positive and negative interest rates have on the allocation of risky assets in investment portfolios.
Specifically, when interest rates decline from zero to a negative interest rate, the average leverage decreases instead of increases. The results clearly indicate that individuals react strongly to zero interest rates.
“President Donald Trump tweeted in September 2019, ‘The Federal Reserve should get our interest rates down to ZERO, or less.’ The goal of this paper is to evaluate the impact of zero and negative interest rates on individuals’ investment decisions,” says Prof. Mosi Rosenboim, of the BGU Guilford Glazer Faculty of Business and Management.
The findings are particularly relevant given the economic fallout from the coronavirus pandemic and already low interest rates, notes Prof. Mosi Rosenboim. The possible implementation of negative monetary policy by central banks, he says, has “divided economists and politicians.”
“The counter-intuitive effect of negative interest rates on saving accounts implies that savers should pay interest rather than receive it,” says BGU economics researcher Dr. Koresh Galil.
“Hence, one can argue that there is no reason for savers to accept negative rates and would prefer to hold cash. However, in practice, the answer to this question is less clear because there are risks associated with holding cash such as losing it or being robbed. This argument is reinforced because worldwide negative interest rates are low, below 1%,” says Dr. Galil.
Further studies are necessary to understand how far below zero interest rates can drop before prompting individuals to hoard cash.