Negative Interest Rates May be More Psychologically Acceptable than Assumed: Implications for Savings

Abstract

The recent implementation of negative interest rates (NIR) by central and commercial banks invites empirical scrutiny of how people would react to this atypical financial policy where one has to pay to let money in the bank. Economic thinking on this issue posits that people would not tolerate NIR on their deposits, and would instead be motivated to spend or invest their money. In two experiments, we find that people, when the alternative is to take one’s savings out of the bank, show a large tolerance to NIR. This tolerance fluctuates as a function of the size of one’s savings (less tolerance for higher amounts), size of NIR (less tolerance for more negative rates), age (older people are less tolerant of NIR) and risk-taking inclinations (those that are more risk-seeking show less tolerance of NIR). The findings are discussed with regards to economic assumptions associated with NIR policy implementation and the psychological implications of this decision-making context.