Working Paper: NBER ID: w24039
Authors: Gauti B. Eggertsson; Ragnar E. Juelsrud; Ella Getz Wold
Abstract: Following the crisis of 2008 several central banks engaged in a radical new policy experiment by setting negative policy rates. Using aggregate and bank-level data, we document a collapse in pass-through to deposit and lending rates once the policy rate turns negative. Motivated by these empirical facts, we construct a macro-model with a banking sector that links together policy rates, deposit rates and lending rates. Once the policy rates turns negative the usual transmission mechanism of monetary policy breaks down. Moreover, because a negative interest rate on reserves reduces bank profits, the total effect on aggregate output can be contractionary.
Keywords: Negative interest rates; Monetary policy; Banking system; Aggregate output
JEL Codes: E3; E30; E31; E32; E4; E41; E42; E43; E5; E50; E52; E58; E65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Negative nominal interest rates (E43) | limited passthrough to deposit and lending rates (G21) |
| Negative nominal interest rates (E43) | decline in passthrough and increase in heterogeneity among banks (F65) |
| Higher reliance on deposit financing (G21) | smaller effects on borrowing rates (E43) |
| Policy rate reduction (E43) | lower growth in loan volumes for banks with high deposit shares (G21) |
| Negative nominal interest rates (E43) | contractionary effects due to their effect on bank profits and intermediation costs (E44) |