Swedish Riksbank uses negative interest rates

August 27, 2009 11:52 p.m.

The Swedish Riksbank , their central bank,is leading the way with creative policy innovations to encourage banks to restart commercial lending by applying a negative interest rate to deposits from commercial banks.The policy which has been discussed by economists like Greg Mankiw as well as myself and other analysts in the past and is discussed in an article in the Financial Times tomorrow(See Andrew Ward and David Oakley, "bankers watch as Sweden goes negative" is designed to pressure the commercial banks to use their funds , particularly those that have been injected into the system by the central bank to begin commercial lending in order to avoid the liquidity trap which John Maynard Keynes discusses in his General Theory( see GT, ch.13, pp 172ff, see also ch.15)

This policy of negative interest rates also has the effect of influencing investors to purchase government bonds   and treasury bills because they are seen as safe and carry positive rates, even if lower than normal rates.The policy seems to be working in Sweden and may well spread to other central banks if similar stagnation in commercial loans develops.Mankiw correctly points out that Silvio Gesell had a version of this policy in his idea of time stamped money which Keynes also discusses in the GT(see Ch.23,vi, pp353 -358) Sweden like many countries faces negative inflation rates and hence the policy is quite appropriate for the moment.