NEGATIVE INTEREST RATES AND HOUSING BUBBLES

Abstract

In years after the financial crisis economists started to propose negative interest rates as a
way how to escape from a liquidity trap. Negative interest rate was considered to be impossible but
few countries have already set them below the lower zero bound. However, it has been done only
in the central banks but not in the commercial banks. The main thesis of this paper is that low
interest rates can inflate a housing bubble and as a result negative interest rates would only inflate
it more. First, proposals how to make interest rate negative even in commercial banking are
presented in the paper. Then we discuss general consequences of negative interest rates such as
redistribution, initiation of a business cycle and most importantly, inflation. Finally, we look at the
housing market and present theoretical and some empirical evidence of a possible ongoing bubble.
The theory suggests that the negative interest rate would inflate the bubble necessarily.
Consequences of a later decrease of housing prices have to be taken into account whenever
negative interest rates are proposed.