Transmission of Negative Interest Rates: Reversal or Amplification?

Jan Lukas Schäfer ()
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Jan Lukas Schäfer: CEMFI, Centro de Estudios Monetarios y Financieros, https://www.cemfi.es/

Working Papers from CEMFI

Abstract: Previous studies have shown that banks avoid passing negative monetary policy rates through to depositors, implying losses in deposit taking that erode equity and eventually have a negative impact on the lending of capital constrained banks. This paper shows that unconstrained banks respond differently, increasing loan supply even more with a deposit zero lower bound (D-ZLB) than without it. As a result, rate cuts below zero can be more stimulative than in positive territory, provided enough banks are unconstrained. A calibrated dynamic model finds this effect substantial, increasing aggregate loan supply by about 9% despite equity erosion pressures.

Keywords: Negative interest rates; bank lending; deposit zero lower bound; financial stability. (search for similar items in EconPapers)
JEL-codes: E43 E52 G21 (search for similar items in EconPapers)
Date: 2026-05
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