On the Negatives of Negative Interest Rates

Aleksander Berentsen, Romina Ruprecht and Hugo van Buggenum

No 2023-064, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Major central banks remunerate reserves at negative rates (NIR). To study thelong-run effects of NIR, we focus on the role of reserves as intertemporal stores of value that are used to settle interbank liabilities. We construct a dynamic general equilibrium model with commercial banks holding reserves and funding investments with retail deposits. In the long run, NIR distorts investment decisions, lowers welfare, depresses output, and reduces bank profitability. The type of distortion depends on the transmission of NIR to retail deposits. The availability of cash explains the asymmetric effects of policy-rate changes in negative vs positive territory.

Keywords: Monetary policy; Interest rates; Money market; Negative interest rate (search for similar items in EconPapers)
JEL-codes: E40 E42 E43 E50 E58 (search for similar items in EconPapers)
Pages: 75 p.
Date: 2023-09-29
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2023-64

DOI: 10.17016/FEDS.2023.064

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