Abstract

This paper shows that most people have misunderstood the rationale behind negative interest rate. Its review also shows that the existing interest rate theories cannot even explain any positive interest rate, not to mention a negative one. It then applies the (Adam) Smith-Choi theory of interest to work out a new theory: one of negative interest rate. Negative or positive interest rate is the result of careful calculation by investors with expectation. Negative interest rate is also the effective tool to stop hot money and to prevent appreciation. The interaction between investors and central banks works out the efficiency market theory of foreign exchange investment.

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