Working Paper: CEPR ID: DP16236
Authors: Marco Onofri; Gert Peersman; Frank Smets
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 theeconomy 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: negative interest rate policy; monetary policy; euro area
JEL Codes: E4; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| negative interest rate policy (NIRP) (E43) | economic contraction (F44) |
| economic contraction (F44) | bank profitability (G21) |
| bank profitability (G21) | credit supply (E51) |
| credit supply (E51) | bank lending rates (G21) |
| liquidity and capital constraints bind (G33) | net worth (G19) |
| net worth (G19) | volume of loans (G21) |
| negative interest rate policy (NIRP) + alternative funding sources (E43) | economic stimulation (O51) |
| negative interest rate policy (NIRP) + additional assets (E43) | intertemporal substitution effect (D15) |