YANG JIE

ABSTRAC：The implementation of monetary policy under zero lower bound is of particular concern since financial crisis. Reasons for low and negative interest rates are related to central banks hedging against a declining economy, achieving inflation targets, ineffective monetary policy and preventing currency appreciation. A prolonged period of negative interest rates could not solve the structural problems in economic growth,on the contrary,it may promote the long-term existence of a leveraged economic growth model. The purpose of this paper is to analyze the cause and effect of negative interest rates, and China's policy enlightenment.

Keywords:Negative Interest Rate, Monetary Policy, Structural Reform

1. Research Background and Significance

1.1 Research Background

Since the financial crisis in 2008, starting with the Swedish central bank, the European central bank, the bank of Japan, the central bank of Switzerland, the Danish central bank and other central Banks significantly cut the benchmark interest rate, or even implemented negative interest rate policy, in order to hedge against the declining economy, prices and rising unemployment. But for some countries, such as Europe and Japan, low interest rates seem to have done little to boost economic growth and inflation.

1.2 Research Significance

As the integration of the economy and global financial progress,interest rate has become an important economic indicator reflecting the macroeconomic situation.In recent years, more and more central Banks adopt interest rate policy as a means of money supply and demand regulation and macroeconomic regulation. Hence, The study of negative interest rate has important practical value in selecting and implementing monetary policies,protecting the interests of investors, improving the efficiency of resource allocation, and realizing social and economic equilibrium and sustainable growth.

2. Literature Review

The theoretical basis for negative interest rates can be traced back more than 100 years. Eggertsson and Mehrotra(2014) established a model to study the root of negative interest rate, results suggested that interest rates are related to savings and population.

In terms of the economic impact of negative interest rates,Caballero etal(2008) attributed global imbalances to low interest rates and believed that long-term negative interest rates tend to lead to inflation, rising prices and economic crisis. In addition, some scholars believed that negative interest rates lead to excessively low interest rates and loose liquidity, leading to increased corporate leverage, resulting in high macro leverage and soaring asset prices, sowing the seeds for the next crisis.

On the relationship between negative interest rates and asset prices,Adametal (2008) constructed a standard consumption model and concluded that negative interest rate induced people's speculative demand, capital flowed into the virtual economy, and excess liquidity further pushed up asset prices.

As a special economic phenomenon, negative interest rate lacks systematic research results in existing literatures. The zero lower bound on interest rates limits the use of conventional monetary policy.Monetary policy in developed countries should shift from the traditional focus on short-term nominal interest rates to the central bank's balance sheet adjustment or other policy options.

3. The Problem of Negative Interest Rate

3.1 The Formation of Negative Interest Rate

The interest rate is the price of money and the cost of borrowing and a negative interest rate is a condition in which the real interest rate is negative. There are two main types of negative interest rate policy,One is to set the nominal target rate negative,such as Europe and Japan.The other is the hidden negative interest rate, which means the real negative interest rate. When the inflation rate is higher than the nominal interest rate and the adjusted real interest rate is negative, the so-called negative interest rate occured.

After the global financial crisis, interest rates in many countries were close to zero,in euro area, Japan, Denmark, Switzerland, Sweden and Hungary, zero or even negative interest rates have been introduced. Risk aversion during crisis led to credit contraction and downward pressure on economy. My understanding is : lack of confidence in the prospect of global economy.

3.2 The Influence Factors of Interest Rate

Total factor productivity and population growth rate are the main influence factors of interest rate. Firstly, Lower productivity growth and an ageing population have led to falling interest rates. Suppose that income in middle age and old age are proportional to overall endowment ,and positive to production force , The loan of young at time t is limited to ,Then interest rate is expressed as , is the number of young people.Therefore,expected decline in productivity will reduce aggregate demand of credit, and interest rates, as asset prices, will tend to fall as expected yields fall.

Secondly, Lending constraints and inflation constraints have contributed to long-term negative interest rates. Deepening of the aging means the decline of overall aggregate demand for money, which directly leads to the imbalance between loan demand and supply, further leads to the decline of the real interest rate. In other words, long-term negative interest rate formation includes two important factors, loan ceiling and inflation floor. On the one hand, low interest rates make young people want to borrow more,but with solvency constraints, their demand for loans could not fully reflected in the market. On the other hand, decline in borrowing of young people at period t means increasing savings at period t+1,therefore,long-term real interest rates will fall even go negative.