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There is more than one way to avoid negative interest rates

There is more than one way to avoid negative interest rates

January 14, 2016

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Economists often think that cash is to blame for the zero lower bound. Official interest rates can’t fall far below zero because, the argument goes, people would hoard cash rather than pay to keep money in their deposit accounts. That has led some policymakers to suggest abolishing cash. In fact, hoarding banknotes isn’t the only way for depositors to get around negative interest rates, as a story in yesterday’s Financial Times shows. People can instead start paying bills early.

Businesses usually like early payment, and sometimes offer discounts to encourage it. Many tax authorities, too, offer discounts to those who pay in advance and charge interest to those who pay late. Not so in Zug, Switzerland, where the logic of negative interest rates has turned payment behaviour upside-down. The canton once offered a small discount to people who paid their tax bills early. Now, early payment is unwelcome, as it means the canton must pay a charge for holding the cash. To reduce the number of early payments, the canton has abolished the discount. It has even stopped charging interest on overdue tax bills.

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