The Signalling Channel of Negative Interest Rates

Oliver de Groot and Alexander Haas

No 201905, Working Papers from University of Liverpool, Department of Economics

Abstract: Negative interest rates are a new (and controversial) monetary policy tool. This paper studies a novel signalling channel and asks whether negative rates can be 1) an effective and 2) an optimal policy tool. 1) We build a financial-friction newKeynesian model in which monetary policy can set a negative reserve rate, but deposit rates are constrained by zero. All else equal, a negative rate contracts bank net worth and increases credit spreads (the costly “interest margin” channel). However, it also signals lower future deposit rates, even with current deposit rates constrained, boosting aggregate demand and net worth. Quantitatively, we find the signalling channel dominates, but the effectiveness of negative rates depends crucially on three factors: i) degree of policy inertia, ii) level of reserves, iii) zero lower bound duration. 2) In a simplified model we prove two necessary conditions for the optimality of negative rates: i) time-consistent policy setting, ii) preference for policy smoothing.

Keywords: Monetary policy; Taylor rule; Forward guidance; Liquidity trap (search for similar items in EconPapers)
JEL-codes: E44 E52 E61 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2019-08
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Forthcoming

Downloads: (external link)
https://www.liverpool.ac.uk/media/livacuk/schoolof ... e,Interest,Rates.pdf First version, 2019 (application/pdf)

Related works:
Journal Article: The signalling channel of negative interest rates (2023)
Working Paper: The Signalling Channel of Negative Interest Rates (2022)
Working Paper: The signalling channel of negative interest rates (2021)
Working Paper: The Signalling Channel of Negative Interest Rates (2020)
Working Paper: The Signalling Channel of Negative Interest Rates (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:liv:livedp:201905

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