Are Negative Nominal Interest Rates Expansionary?

Gauti Eggertsson, Ragnar Juelsrud and Ella Getz Wold

No 24039, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Following the crisis of 2008 several central banks engaged in a radical new policy experiment by setting negative policy rates. Using aggregate and bank-level data, we document a collapse in pass-through to deposit and lending rates once the policy rate turns negative. Motivated by these empirical facts, we construct a macro-model with a banking sector that links together policy rates, deposit rates and lending rates. Once the policy rates turns negative the usual transmission mechanism of monetary policy breaks down. Moreover, because a negative interest rate on reserves reduces bank profits, the total effect on aggregate output can be contractionary.

JEL-codes: E3 E30 E31 E32 E4 E41 E42 E43 E5 E50 E52 E58 E65 (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: ME
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Citations: View citations in EconPapers (66)

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