Abstract
The purpose of this paper is to analyze the impact of negative interest rates on economic activity in a selected group of countries, in particular Sweden, Denmark, and Switzerland, for the period 2009–2018. The central banks of these countries were among the first to implement negative interest rates to revive the economic growth. Therefore, this study analyzed long- and short-term relationships between interest rates announced by central banks and gross domestic product and blue chip stock indices. Time series analysis was conducted using Engle-Granger cointegration analysis and Granger causality testing to identify long- and short-term relationship. The first step, using the Akaike criteria, was to determine the optimal delay of the entire time interval for the analyzed periods. Time series that seem to be stationary were excluded based on the results of the Dickey-Fuller test. Further testing continued with the Engle-Granger test if the conditions were met. It was designed to identify co-integration relationships that would show correlation between the selected variables. These tests showed that at a significance level of 0.05, there is no co-integration between any time series in the countries analyzed. On the basis of these analyses, it was determined that there were no long-term relationships between interest rates and GDP or stock indices for these countries during the monitored time period. Using Granger causality, the study only confirmed short-term relationship between interest rates and GDP for all examined countries, though not between interest rates and the stock indices. Acknowledgment The paper has been created with the financial support of The Czech Science Foundation GACR 18-05244S – Innovative Approaches to Credit Risk Management.
Highlights
For central banks, negative interest rates have become a more important monetary policy tool than anticipated before the financial crisis
Prior to the global financial crisis, many economists assumed that negative interest rates would be effective when combined with other unconventional monetary policy tools as they would provide sufficient incentives to revive economic growth
The purpose of this paper is to find a relationship between negative interest rates and economic activity in the selected countries for the years 2009 to 2018, using statistical methods of cointegration analysis and Granger causality to identify long-term and short-term relationships
Summary
Negative interest rates have become a more important monetary policy tool than anticipated before the financial crisis. Prior to the global financial crisis, many economists assumed that negative interest rates would be effective when combined with other unconventional monetary policy tools as they would provide sufficient incentives to revive economic growth. Conventional monetary policy tools primarily began to fail in conjunction with the 2008 financial crisis, when many central banks reached near zero in setting monetary policy interest rates, and it was not possible to continue lowering the rates, thereby further easing monetary conditions. The central banks needed to resort to tools that they had no experience with First of all, this led to setting negative rates, quantitative easing, and even forward guidance
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