The Effects of Negative Interest Rates on Equity and Currency Markets

This paper examines the effects of negative interest rate policies (NIRP) on foreign exchange and equity markets of eight European countries and Japan. NIRP announcement effects on currency depreciation are shown to be transitory and country dependent. In contrast, on the day of NIRP implementation, both currency and equity market returns reacted negatively across countries, with little evidence of overreaction or underreaction. Significant covered interest arbitrage opportunities in the currency markets of EU countries over the period of NIRP are observed. These findings suggest that monetary policy that involves lowering interest rates below zero is neither stimulative nor efficiency enhancing.