Negative rates: a massive transfer from savers to bank shareholders and governments with little impact on economic growth. (Post in response to Miles Kimball)

This post explores the consequences of deeply negative interest rates set by the ECB, as proposed by professor Miles Kimball. It’s a shorter version of my previous post, plus an estimation of the economic stimulus of the proposal.

To recap, the idea is that the ECB would set its policy rates at -4%. This negative rate would be applied on reserves and on cash in circulation. Banks transmit the -4% rate to the short term credits and deposits of their clients. In my example, I used real figures1 from the eurozone and assumed that the ECB would keep its rates at -4% for six months.

As shown in the previous post, this policy creates a profit (positive) or loss (negative) for the following economic agents. All figures in billion euro:

Commercial banks: +73 (+148 from deposits, -40 from reserves, -22 from private sector loans, -13 from government bonds)

The ECB: +62 (+40 from reserves, +22 from cash)

Non-financial holders of cash and bank deposits: -170 (-148 from bank deposits, -22 from cash)

Non-financial private sector borrowers: +22 (from lower interest on loans)

The government: +13 (from lower interest on bonds)

Note that this analysis makes every wealth transfer between agents due to negative rates explicit.

Now, the financial sector (commercial banks and the ECB) doesn’t consume or invest2. Banks transfer their profits as dividends to their owners. When analyzing the economic stimulus from bank profits, we have to look at the behavior of their shareholders. The shareholders spend money in the real economy.

The government, including ECB dividends: +75 (= 13 + 62)

(Commercial) bank shareholders: +73


Economic stimulus

The impact analysis of negative rates hinges on assumptions about the marginal propensity to consume (MPC) of different economic agents. Be aware that the MPC is a fudge factor. Economists can tweak MPC values to support their favored policies!

So here are my assumptions:

MPC of non-financial holders of cash and bank deposits: 0.53

MPC of non-financial private borrowers: 0.754

MPC of the government: 15

MPC of bank shareholders: 06

So how will spending patterns change in response to negative rates?

We need to multiply the profit (or loss) of each of the four relevant economic agents (non-financial holders of cash and bank deposits, non-financial private sector borrowers, the government, and bank shareholders) with their MPC. The sum of those products is the net extra spending caused by the negative rates.

The result is (-170 x 0.5) + (22 x 0.75) + (75 x 1) + (73 x 0) = +6.5

In other words, under my assumptions, negative rates increase GDP by just €6.5 billion.



Under plausible assumptions for the marginal propensity to consume for four non-financial economic classes (non-financial holders of cash and bank deposits, non-financial private sector borrowers, the government, and bank shareholders), an ECB rate of -4% for half a year would

  • reduce the net worth of holders of cash and bank deposits by €170 billion
  • reduce borrowing costs for the non-financial private sector by €22 billion
  • enable governments to increase spending by €75 billion
  • transfer €73 billion to bank shareholders
  • increase economic output by €6.5 billion compared to the baseline scenario without ECB intervention

In other words, €170 billion is taken from owners of cash and bank deposits. This wealth is mainly transferred to bank shareholders and to the government. Therefore, negative rates are a ‘reverse Robin Hood operation’, ‘stealing’ money from the many and giving it to the rich and powerful.7 This policy would stimulate economic growth by less than 4%8 of the wealth that is transferred.


Don’t forget to buy Bankers are people, too: How finance works as a Christmas present for the favorite banker/economist in your life! As I show in Part VI – The political economy, central bankers can never be politically neutral technocrats, because monetary policy causes wealth transfers between economic agents. This blog post is another illustration of that fact.

  1. See previous post for references to the source material from the ECB.
  2. Apart from limited investment in buildings and equipment.
  3. Remember that lower income households (i.e. with a higher MPC) hold relatively more cash and deposits than the rich. Borrowers also hold some money. So we can’t treat holders of cash and deposits as rentiers with a very low MPC.
  4. While borrowers have a higher MPC than savers, in aggregate they won’t spend all extra income. Think about the often-repeated argument against tax cuts for companies (a lot of corporates are borrowers): lower corporate taxes don’t go to investments, but end up in the pockets of shareholders.
  5. We can all agree that the government tends to spend like a drunken sailor. A lot of government ‘spending’ is actually transfers that aren’t counted in GDP, but let’s assume receivers of government handouts spend all of the money they get.
  6. That’s not just my assumption, Miles advocates that banks retain their profits.
  7. Indeed, cash and bank deposits are the most equally distributed financial assets. (Bank) stocks are mostly owned by those at the top of the wealth distribution.
  8. 6.5/170 = 4%

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