Working Paper: NBER ID: w25416
Authors: Gauti B. Eggertsson; Ragnar E. Juelsrud; Lawrence H. Summers; Ella Getz Wold
Abstract: We investigate the bank lending channel of negative nominal policy rates from an empirical and theoretical perspective. We find that retail household deposit rates are subject to a lower bound (DLB). Empirically, once the DLB is met, the pass-through to lending rates and credit volumes is substantially lower and bank equity values decline in response to further policy rate cuts. We construct a banking sector model and use our estimate of the pass-through of negative policy rates to lending rates as an identified moment to parameterize the model and assess the impact of negative policy rates in general equilibrium. Using the theoretical framework, we derive a sufficient statistic for when negative policy rates are expansionary and when they are not.
Keywords: negative interest rates; bank lending; monetary policy; Sweden
JEL Codes: E3; E31; E4; E41; E42; E43; E44; E5; E51; E52; E58; E65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| passthrough to retail household deposit rates and lending rates (G59) | decline in bank equity values (G21) |
| Negative policy rates (E43) | increase in lending rates (G21) |
| Composition of bank financing (G21) | responsiveness of lending rates to policy rate cuts (E52) |
| Bank financing reliance (G21) | lower credit growth once deposit rate reaches lower bound (E51) |
| Negative policy rates (E43) | passthrough to retail household deposit rates and lending rates (G59) |
| Negative policy rates (E43) | impact on bank profits (G21) |
| 100 basis point reduction in policy rate (E43) | 177 basis point contraction in output (E20) |