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Can Nominal Interest Rates Be Negative?

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My finance professor asked us "can nominal interest rates be negative?" at the end of class yesterday, and I've been pondering it. I guess in times of war you would "pay" an institution to safeguard your assets and that would result in a negative rate. Also, in times of deflation wouldn't you have a negative nominal rate as well?

Just kicking up some ideas.

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I don't see how, unless he's got some special definition of "interest rate". As I understand it, interest is something paid for borrowing. A bank may simply guard your money (as in a checking account) or borrow (as in a savings account). If you have to pay the bank, it's called a fee, not "negative interest".

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The answer is yes. In the early seventies for a short period, swiss franc deposits offered negative rates. This was because other currencies were devaluing, and it would be impractical to simply hold huge bundles of physical francs. World investors were fleeing devaluing currencies and buying swiss francs.

For long periods of time I doubt savers would take negative rates. Instead, they would probably be taking on higher risk investments that offered positive nominal rates, and pure savings deposits would have lower popularity.

I don't think in a free economy, even with a flat gold money supply, deflation would occur for long periods at a pace that was greater than the time preference premium wold overcome. So extended periods of negative rates would be unusual.

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I was told many years ago that Swiss banks charged a 'storage fee' to warehouse your money. Could that the construed as negative interest?

When I think of negative interest, it's more in the context of loans and mortgages. With the advent of negative amortization mortgages and adjustable rate mortgages, seeing payments as low as $800/month for a $600,000 mortgage, the notion of negative interest comes to mind.

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