Why Are Negative Interest Rates Failing? An Analysis of the Swiss Case

Miguel Alquezar and Gabriel Bracons (both Economics ’17 and alumni of UPF Undergraduate Program in Economics) present their Bachelor thesis research work, supervised by Barcelona GSE Affiliated Professor Luca Fornaro.

Standard macroeconomic theory tells us that a reduction of the interest rates, even into the negative ground, should lead to an increase in consumption and investment through the real interest rate channel, by lowering liquidity-constraints on firms and households and discounting future returns. On the currency market, such a measure should discourage capital inflows, leading to a lower demand of the currency, and thus its depreciation. However, the policy also erodes the profitability of banks as it reduces the net interest margins, and hence increases their own default risk. Furthermore, anomalies in the valuation of returns and payment streams usually put pressure on the financial institutions to redesign financial transactions functioning. Finally, as this policy was unconventional, uncertainty has been a key parameter in the short run, thus increasing results volatility and counteracting most of its efficiency.

On our attempt to see to which extent theory matched reality, we checked the main economic indicators of the Swiss economy and found that real economic variables such as real GDP, unemployment rate, money velocity and loan rate were not affected by the negative interest rates policy (see charts above).  But this monetary policy was not neutral either as other monetary variables such as currency in circulation (M2) and exchange rate with the Euro have been negatively impacted. Theory was also proven wrong by saving deposits which actually increased (see charts below). This adds evidence to the fact that negative interest rates have failed to achieve their expected benefits, mainly due to the increase in uncertainty generated by this “unconventional” policy.  Remarkably, Swiss banks’ balance sheets show that even under negative interest rates, deposits have not sunk and lending has been steadily increasing, especially in mortgages. The only variable that seems to start to react is inflation, which is expected to be around 1% in 2017.


According to the theoretical implications presented above, real economy and inflation should improve as well as the whole set of variable related to them, triggering a vigorous recovery. However, real economy has not reacted to the negative interest rates as expected and the real variables remain weak by Swiss standards. Moreover, nominal variables and other indicators such as money velocity, money multiplier or loans growth have also not reacted as predicted. The fact that banks do not charge clients appears to be the main problem as they do not transfer the interest, thus accumulating more risk without further profits. This means that in the long run, the banking sector has to find a different way to offset losses that come from the negative interest rates. To solve this situation, a set of new policies has been proposed, ranging from punishing banks that do not lend money with different interest rates, to giving strong incentives to banks to lend some share of their assets in exchange of very generous conditions. Additionally, some changes to the basic model have been suggested to reduce the gap between theory and reality. Hence further work on the adoption of these new policies and changes to the model should be a fruitful line of research.

You want to learn more about this very interesting and topical issue? Consult their full research paper here: Why are negative interest rates failing?

Is the fat tax really effective?


Recently, some European countries, including Spain, have considered introducing new taxes to reduce their budget deficits. Among the set of measures, they have proposed a fat tax, which has the aims of not only increasing revenues, but also reducing junk food consumption, and thereby obesity rates and the concomitant health costs.

Although this is what we expect from the theory, empirical evidence is revelatory of a different picture. Firstly, the tax is not fully reflected in the prices of the products that have been targeted. In fact, in the countries where the tax has been imposed, supermarkets and other food stores have played with prices and margins of other products in an attempt to avoid raising the prices of the products that are subject to taxation. For example, some firms have increased the prices of substitutes (e.g. sodas with low calories) while spreading the higher cost of taxed food onto other foods or own-branded products that typically have higher profit margins. Another interesting reaction from the supply side has been that producers have been substituting those taxed products with un-taxed products that are just as unhealthy. Additionally, they have also reduced the amount of some inputs below the legal threshold to avoid the fat tax. Ostensibly, these tricks have clearly diminished the effectiveness of the tax.

On the demand side, we have also seen interesting reactions. Firstly, it is important to notice that people who consume more junk food are less responsive to a price increase than moderate consumers. Hence, the fat tax is not actually benefiting its most important target audience. Furthermore, there is an important substitution effect as all products have, on the whole, become more expensive, consumers have switched to cheaper goods of lower quality.

According to different studies, the impact of the fat tax has not achieved its desired outcomes, and there has not been a significant reduction in obesity rates. Therefore, although some studies claim that what is needed is a higher tax of at least 20% to lead to a sizeable decrease in obesity rates, it is unlikely that this policy alone would be effective enough. Moreover, it is a highly regressive tax because poor people are spending more on less healthy foods. In view of this, we should instead study the introduction of other interventions such as heathy food subsidies, campaigns promoting a healthy diet, health education at school to try to curb obesity through moral suasion from an early age and , albeit a very unpopular one, taxing people according to their body mass index.


Leicester and F. Windmeijer. The ‘fat tax’: economic incentives to reduce obesity. Institute for Fiscal Studies

ECORYS (2014). Food taxes and their impact on competitiveness in the agri-food sector. ECSIP

Frank, S.M. Grandi and M.J. Eisenberg (2013). Taxing junk food to counter obesity. American Journal of Public Heath

Cornelsen, R. Green, A. Dangour and R. Smith (2014). Why fat taxes won’t make us thin. Journal of Public Health.