Does the choice of monetary policy tool matter for systemic risk? The curious case of negative interest rates

Abstract

This study evaluates the impact of a negative interest rate policy (NIRP) on systemic risk, covering a wide range of economies over a relatively long term. Monetary policy affects banks’ vulnerability to systemic risk events and the likelihood of triggering such events, particularly among institutions connected via the contagion network. With a rising magnitude of interest rate shocks, the effect on systemic risk becomes non-linear, being driven more by contagion, especially under NIRP. The uniqueness of the impact of NIRP may be characterized as arising from the evolution of the structure and intensity of impulse transmission while leaving the structure of the monetary policy transmission mechanism unaffected.