What are the implications of low and negative interest rates for money supply and inflation dynamics?

Neste caso, temos que separar a realidade econômica em países de 1o mundo versus os Brics. Em mercados mais estruturados, liberais, abertos, normalmente trabalham com taxas de juros menores do que nos países do Brics. Por que? Porque o equilíbrio entre oferta e demanda (seja em moedas, produtos e serviços) se dá via mercado e não via regulação governamental. Em países como o Brasil onde existe uma forte presença do Estado na economia e o próprio governo financia suas atividades com o dinheiro do mercado, torna o custo do dinheiro mais caro do que em países do 1o mundo. Ai reside uma das várias explicações para o baixo crescimento da economia brasileira em relação a outros países na última década.

Las tasas de interés bajas o negativas amplían la oferta monetaria al incentivar el préstamo y reducir el atractivo del ahorro, estimulando el consumo y la inversión 💸. Esto puede acelerar la actividad económica y presionar al alza la inflación 🔺. Sin embargo, desincentivan el ahorro y pueden depreciar la moneda, elevando el costo de las importaciones y aumentando la inflación importada 📈. Estas políticas también alteran las expectativas inflacionarias y pueden llevar a burbujas en los mercados de activos 🏦, con riesgos significativos para la estabilidad económica si estas burbujas estallan 💥. Modelos como el IS-LM y la Curva de Phillips explican cómo las tasas de interés afectan la economía general y la inflación 📊.

High interest rates often lead to increased savings and reduced borrowing thus contracting the money supply. Conversely low rates stimulate borrowing and spending which tend to expand the money supply. This dynamic is key to central banks' strategies to influence economic growth and stability. As a financial analyst, understanding these concepts is vital for interpreting market conditions and guiding investment decisions in various economic climates.

Recent developments may have challenged the traditional wisdom regarding targeting a specific interest rate to influence the money supply. In the U.S., since the beginning of the last hiking cycle, from April 2023 (4.83% effective federal funds rate) to December 2023 (5.33% EFFR), the money supply has actually risen from $20,705 billion to $20,865 billion. In practice, we are observing that the initial aggressive interest rate hikes in 2022 did reduce M2 money supply. Still, once a certain level has been reached and the Federal Reserve holds the official rate unchanged, this higher interest rate may, in fact, increase economic activity due to a higher savings return, leading to an increase in money on the sidelines.

The interaction between money supply and interest rates is a dynamic and crucial aspect of economic management. High interest rates tend to reduce the money supply by encouraging saving and discouraging borrowing, while low interest rates increase the money supply by promoting borrowing and spending. This interplay is essential for central banks in their efforts to steer the economy towards desired outcomes, balancing growth, and stability.

Mais uma vez devemos separar países de 1o mundo dos Brics. Em países de 1o mundo existe um "estímulo" para que os bancos financiem investimentos, capital de giro, etc. Ele fomenta o desenvolvimento da economia privada com a política monetária e taxas de juros negativas. No caso do Brasil, não funciona assim. O banco central tem os depósitos compulsórios onde determina que um % do capital dos bancos fique retido no BC. Ou seja de R$ 100,00 depositados num banco, somente R$ 50,00 ou menos são destinados para operação de crédito. Na outra ponta, as empresas tem limites de captação de dinheiro junto a entidades financeiras. Normalmente na faixa de 30% do seu faturamento anual. Novamente um sistema muito mais regulado no Brasil.

From my experience I've observed that negative interest rates can significantly impact money creation. It discourages banks from holding excess reserves, as it costs them instead they're incentivised to lend more. This effectively generates new money in the economy. Lower borrowing costs also makes households and businesses to take more loans which further increasing economic activity and money supply. While this strategy can boost growth in sluggish economies, it also carries complex implications for savers and the overall financial system stability.

Low and negative interest rates can also impact inflation dynamics. In a low-interest-rate environment, there is a potential for increased inflationary pressures as borrowing becomes more attractive, leading to higher demand for goods and services. On the other hand, negative interest rates may signal economic challenges, potentially contributing to deflationary pressures as consumers and businesses become more cautious about spending. Central banks often deploy low or negative interest rates as monetary policy tools to manage economic conditions. I think the effectiveness of these measures depends on various factors, including the overall economic environment, the health of financial institutions, and global economic trends

In a negative interest rate environment, central banks may charge financial institutions for holding excess reserves. This unconventional policy aims to incentivize lending and discourage the hoarding of cash. It may further influence the money supply by encouraging spending and investment.

Negative interest rates, theoretically, incentivize banks to lend more, thus increasing money creation. The effectiveness depends on banks' willingness to lend and consumers' and businesses' willingness to borrow.

Exatamente. Esta tem sido a política do FED no USA para permitir o crescimento da economia e consumo nos últimos 40 anos pelo menos. Esse ciclo só foi quebrado com a pandemia que desequilibrou a relação de oferta & demanda, criando uma inflação de oferta, já que as cadeias de suprimentos foram desajustadas e por outro lado o governo colocou mais $ na economia por conta do isolamento social e fechamento dos negócios. Por isso o FED elevou os juros para o patamar de 5,5% ao ano. No Brasil nós jamais vimos esta realidade e vai demorar para vermos, devido a forte intervenção do governo na economia. Com os juros negativos há um incentivo ao investimento e risco, o que não ocorre no Brasil.

Negative rates often discourage saving due to the eroding value of cash in bank accounts, prompting people to spend or invest more. This shift towards spending and investing in assets like stocks and bonds can increase the velocity of money, speeding up transactions. Higher money velocity means each currency unit is generating more economic activity. Understanding this dynamic is crucial in analysing economic health and guiding investment decisions in that environment.

Países emergentes, como é caso do Brasil, sofrem com taxas de juros elevadas, pois como a questão inflacionária é latente, é preciso que o Banco Central esteja atento para realizar uma política monetária eficaz para proporcionar equilíbrio econômico afim de manter a economia em condições minimamente favoráveis para a fomentação do crescimento.

The impact of negative interest rates on inflation is less straightforward. It depends on how financial institutions and the broader economy respond. Negative rates might encourage spending, but they can also pose challenges for banks and impact their profitability, potentially affecting lending.

By penalizing banks for holding excess reserves, negative rates aim to boost money circulation. Yet, the impact is contingent on the broader financial and economic environment, influencing spending and investment decisions.

"Understanding the dynamics of money supply and inflation is crucial for economic stability." — Milton Friedman Low and negative interest rates have profound implications for money supply and inflation dynamics. These rates encourage borrowing and spending, potentially increasing the money supply. However, their impact on inflation can be complex and context-dependent. For example, Japan's prolonged period of low and negative interest rates aimed to combat deflation and stimulate economic activity. While it increased the money supply, it didn't lead to significant inflation due to structural economic issues and subdued demand.

Quando existe um equilíbrio entre oferta e demanda de produtos e serviços, não ocorre inflação. Quando uma destas pontas se desequilibra em relação a outra ocorre inflação. Na pandemia ocorreu exatamente isso. Com o isolamento social, em alguns produtos diminuiu a oferta e na outra ponta os governos colocaram dinheiro na mão das pessoas porque a atividade de trabalho foi paralisada. Esse desequilíbrio gerou inflação no mundo todo, inclusive no Brasil. Um bom exemplo é o petróleo. Quando a OPEP decide baixar a produção, seu objetivo é elevar os preços, fornecendo menos petróleo ao mercado e vice versa. Quando os bancos centrais aumentam os juros visam reter o capital investido nos bancos e não incentivar o consumo e gastos das famílias.

Inflation, measured by the CPI, signifies a general price increase. Influenced by supply, demand, expectations, exchange rates, and monetary policy, it adheres to the quantity theory of money, linking it to the money supply with assumptions of constant velocity and real output.

The dynamics of money supply and inflation involve a complex interplay between the total money in circulation (money supply) and the general rise in prices for goods and services (inflation). Central banks influence money supply through policy tools like interest rates. An increase in money supply, if excessive, can contribute to inflation, while a decrease may lead to deflation. Striking a balance is crucial for economic stability, and central banks play a pivotal role in managing these dynamics through monetary policy measures. Understanding these interactions is essential for informed economic decision-making.

An increase in money supply can lead to inflation if it outpaces economic growth. However, in a low demand scenario, the relationship might not hold, as excess liquidity might not translate into higher spending.

That's quite an interesting question. In my view, low and negative interest rates can influence inflationary dynamics in several ways. - For example, negative interest rates can stimulate consumption and investment, potentially increasing aggregate demand and consequently putting upward pressure on prices, which can lead to inflationary pressures.

You're absolutely right. The quantity theory of money, while valuable in understanding inflation, offers a simplified view and its predictive power weakens in certain circumstances, particularly in environments with extremely low or negative interest rates.

While intended to combat deflationary pressures, low and negative rates may not always stimulate inflation as expected. The effectiveness often hinges on consumer confidence and the velocity of money.

The text explores the Quantity Theory of Money, which suggests that an increase in the money supply should lead to higher prices. However, this relationship is complex, especially with low or negative interest rates. If the demand for money is low, as people prefer spending or investing, an increased money supply may not lead to higher inflation due to increased money velocity. Additionally, if technological advancements or global competition boost the supply of goods and services, higher money supply may not cause inflation, as real output also increases. This highlights the intricate nature of monetary policy and inflation.

In India’s economy, the link between money supply and inflation isn't always straightforward, especially when interest rates are low or negative. While traditional theory suggests that more money in circulation should lead to higher prices, the outcome depends on factors like how quickly money changes hands and the level of economic output. For instance, if people prefer spending over saving, inflation might not rise even with more money in the system. Similarly, advances in technology or global competition can increase the supply of goods, keeping inflation in check despite a growing money supply. Understanding these dynamics is key to grasping how inflation behaves in different economic conditions.

Sim, quando as taxas de juros estão baixas ou negativas, limita a ação do BC. Por outro lado, a economia flui bem se as outras políticas estão adequadas na sua combinação. Estamos falando de política fiscal, emprego, investimentos, social, etc. O papel do BC é manter o valor da moeda e caso surja inflação, agir subindo a taxa de juros para recuperar este valor deteriorado pela inflação. Estando as políticas econômicas dando certo de forma combinada, não há motivo para se preocupar com a taxa de juros baixa ou negativa.

The negative aspects of negative rates are well documented, as are the benefits, but the biggest problem with negative rates is that investors and businesses treat them as temporary rather than something that will stay for longer than a moment. As a result, they don't change their behavior so that the utility of the negative rates is mitigated. They stick with the view that rates will return to "normal" and don't often adjust their models and systems to accommodate negative rates. Granted, the accommodations can be extensive and it may be that rate effects are not symmetrical between positive and negative rates, but without adjusting to negative rates the outcome will be less effective and may prolong the need for negative rates.

To reduce the adverse effects of prolonged low rates, we could implement a dynamic fiscal-monetary coordination framework. This would be a mix of targeted fiscal stimuli with innovative monetary tools, potentially including digital currencies, to enhance transmission mediums and mechanisms. By fine-tuning this approach, we could navigate the liquidity trap while ensuring sustainable growth and price stability.

Implementing low and negative rates challenges traditional monetary policy tools. It can lead to diminishing returns and unintended consequences in financial markets and bank profitability.

If central banks interest rates are hovering around 2%, change is absolutely necessary. Very low interest rates only give added incentive for people to put their money elsewhere. When you’ve factored in admin and legal costs, it makes sense for investors to move their money elsewhere in search of more robust returns. The biggest example is Japan. The combination of low interest rates and next-to-no real monetary policies made investments ineffective, causing a huge investment collapse. Low / negative interest rates have damaging effects on the velocity of money and the economy. Without government intervention, people will choose to invest in other things.

I believe the implications of low and negative interest rates for money supply and inflation dynamics are complex. While low rates can stimulate economic activity and increase the money supply, negative rates may introduce challenges such as potential impacts on savings behavior and increased uncertainty. The management of interest rates remains a critical tool for central banks, requiring careful consideration

In my economic research I've observed that negative interest rates have far reaching impact. For example while they encourage consumer spending, they can squeeze bank profits by inverting traditional interest earning models. There's also a psychological shift which challenges the conventional approach to saving and long term financial planning. These rates can also inadvertently fuel asset bubbles as seen in overinflated real estate or stock markets due to easy borrowing. Such insights highlight the complexity and varied effects of negative interest rates, making even more important the need for comprehensive economic analysis.

Low and negative interest rates can have profound implications for money supply and inflation dynamics. By reducing borrowing costs, they encourage increased lending and spending, potentially boosting money supply. However, prolonged periods of such rates can erode savings returns, leading to higher consumption over savings. This can stimulate economic activity but also risk overheating the economy and triggering inflation. Central banks must balance these dynamics carefully to avoid long-term financial instability.

Monetary policy should be crafted with an awareness of both long-term trends influencing the propensity to save and shorter-term dynamics like the fiscal stance. In recent years, the latter has taken center stage as fiscal policy has turned pro-cyclical, amplifying inflationary pressures and likely sustaining elevated interest rates for an extended period.