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What concerns does lower interest rates have in the short and long term? Is it a...

What concerns does lower interest rates have in the short and long term? Is it a good idea to boost an economy that has a 0% interest rate? In the case of Sweden what happened to the economy when they introduced negative interest rates in 2015?

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Answer #1

Low interest rates makes borrowing cheap which boosts output and investment in the short run. In the long run, low interest rates lead to the building up of inflationary pressures. This is because of the accumulation of inflationary expectations over time.

It is not a good idea to boost an economy with 0 interest rates, as the economy already has high liquidity and further infusion of liquidity will cause very high inflation.

The introduction of negative interest rates led to very high inflation in the economy and unsustainable economic growth. Since people had too much cash, they had no way to store the money that was fast losing value. Some people were reported to have kept money under their pillows and blankets. Since this policy was unsustainable, the negative interest rates were later abolished.

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