Why is the IMF afraid of negative interest rates?

Prof. Jayanth R. Varma's Financial Markets Blog

A few days back, the IMF made a change in its rule for setting interest rates on SDRs (Special Drawing Rights) and set a floor of 5 basis points (0.05%) on this rate. The usual zero lower bound on interest rates does not apply to the SDR as there are no SDR currency notes floating around. The SDR is only a unit of account and to some extent a book entry currency. There is no technical problem with setting the interest rate on the SDR to a substantially negative number like -20%.

In finance theory, there is no conceptual problem with a large negative interest rate. Though we often describe the interest rate (r) as a price, actually it is 1+r and not r itself that is a price. The price of one unit of money a year later in terms of money today is 1+r. Prices…

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