The Effectiveness of a Negative Interest Rate Policy

Marco Onofri, Gert Peersman () and Frank Smets

No 16236, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze the effectiveness of a Negative Interest Rate Policy (NIRP) in a quantitative Dynamic Stochastic General Equilibrium model for the euro area with a financial sector. Similarly to other studies in the literature, we show that a NIRP can have a contractionary effect on the economy when there is a zero lower bound on the interest rate of household deposits, and such deposits are the only source of bank funding and household savings. However, we show that the contractionary effects vanish and the NIRP becomes expansionary when we allow for additional assets in the savings portfolio of households, and when we introduce alternative sources of bank funding in the model, such as bank bonds. These two features, which characterize the euro area very well, are hence essential to study the effectiveness of a NIRP.

Keywords: Euro Area; monetary policy; Negative interest rate policy (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2021-06
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Working Paper: THE EFFECTIVENESS OF A NEGATIVE INTEREST RATE POLICY (2021)
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