The push for negative rates invites the question: What are their consequences? We examine this question empirically by analyzing the case of Sweden, one of the first countries to experiment with a negative policy rate, and the first country to complete the experiment.1 We then discuss the implications of our results for larger economies.
The Swedish central bank, the Riksbank, first entered negative rate territory when its deposit rate for commercial banks became negative in 2009. The Riksbank became a pioneer with this one small step. However, its main policy rate, the repurchase (repo) rate, remained positive. This situation lasted for only a brief period. In 2010, the Riksbank moved away from the negative deposit rate due to a rapidly recovering economy.
The second move came in February 2015, when the Riksbank announced a repo rate of −0.10 percent. This rate was further reduced to −0.50 percent in 2016, a level maintained until January 2019, when the rate was raised to −0.25 percent. A further increase of 25 basis points followed in December that year, terminating the subzero regime after five years.
The move to a negative interest rate was an unusual step not only because the Riksbank became the first inflation‐targeting central bank to break the zero lower bound, but also because the Riksbank broke its previous behavior of shadowing the European Central Bank (ECB). Figure 1 illustrates the policy rates in Sweden, the euro area, and the United States in the period between the introduction of the euro in 1999 to 2019. The Riksbank normally shadows the ECB’s policy rate. Here the 2015–2019 period stands out with the Riksbank being more expansionary compared to the two major central banks judging from the main policy rates.2