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Negative rates and the transmission of monetary policy

Miguel Boucinha (), Lorenzo Burlon and Daniel Kapp

Economic Bulletin Articles, 2020, vol. 3

Abstract: This article explains how negative rates are transmitted via banks and financial markets, both via standard transmission channels and via channels specific to negative interest rates. The latter can enhance the stimulus, but may also hinder it, in particular in the case of protracted periods of negative rates. Euro area bank profitability has been persistently low since the financial crisis, and this has the potential to impair bank lending. At the same time, profits have increased since 2014 and the impact of negative interest rates is assessed as broadly neutral so far, as the negative contribution to net interest income has been offset by the positive impact on borrower creditworthiness. Finally, the article reports empirical evidence – drawn from a range of studies – on how negative rates affect the broader economy, starting with bank portfolio allocation decisions, lending volumes and lending rates. The article then elaborates on the impact of the negative rate policy on key macroeconomic aggregates, notably economic activity and inflation. JEL Classification: E42, E52, G21

Keywords: Bank lending; monetary policy (search for similar items in EconPapers)
Date: 2020-05
Note: 2808899
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Handle: RePEc:ecb:ecbart:2020:0003:2