Saturday, December 12, 2015

Switzerland's negative interest rates

Here's the model for Swiss interest rates presented both as an upper bound (representing ideal information transfer so that observed interest rates are less than the ideal interest rate r < r*) and as a fit:


Negative interest rates can be seen in the "bound" form as representing un-modeled complex economic interactions as discussed here using an ideal gas as an analogy. In that post, the PV diagram for a gas is observed to be below the "ideal bound" set by the ideal gas law because of molecular forces and condensation from a gas to a liquid.

In the interest rate model, we'd imagine because of e.g. program buying by mutual funds or the costs of holding physical currency information equilibrium would be a bad assumption and since the bound is near zero, negative rates become possible.

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Also, try to avoid the use of dollar signs as they interfere with my setup of mathjax. I left it set up that way because I think this is funny for an economics blog. You can use € or £ instead.