Macroeconomic reversal rate in a low interest rate environment

Jan Willem End, Paul Konietschke, Anna Samarina and Irina M. Stanga

No 2620, Working Paper Series from European Central Bank

Abstract: This paper investigates how the monetary policy transmission channels change once the economy is in a low interest rate environment. We estimate a nonlinear model for the euro area and its five largest countries over the period 1999q2-2019q1 and allow for the effects of monetary policy shocks to be state dependent. Using smooth transition local projections, we examine the impulse responses of investment, savings, consumption, and the output gap to an expansionary monetary policy shock under normal and low interest rate regimes. We find evidence for a macroeconomic reversal rate related to the substitution effects becoming weaker relative to the income effects in a low interest rate regime. In this regime the effects of monetary policy shocks are either less powerful or reverse sign compared with a normal rate regime. JEL Classification: E21, E22, E43, E52

Keywords: low interest rate environment; monetary policy; reversal rate (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212620

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