Negative Interest Rate Policy Research Articles

Multicountry Time-Varying Taylor Rule: Modeling Unconventional Monetary Policies and Bond Premiums

AbstractIn the post-financial-crisis era, advanced economies have increasingly adopted unconventional monetary policies such as zero interest rate policy, negative interest rate policy, forward guidance communication, and international coordination policies. Consequently, the traditional Taylor rule has lost some of its explanatory power. This analysis extends the Taylor rule from a single-country to a multicountry analysis using cross-country panel data, incorporating nonmacro factors and stationary correlation in the diffusion matrix for a dynamic factor analysis, specifically covering the Group of Seven countries with datasets compiled by Bloomberg L.P. for the period 1999–2022. This approach comprehensively models these unconventional monetary policies, demonstrating greater statistical validity than existing models. Notably, the model extracts the impact of zero interest rate policy and negative interest rate policy as nonmacro factors and presents the high correlation of residuals as indicative of international coordination among central banks. Additionally, by interpreting the discrepancy between the Taylor rule and actual rate as unintended interest rate fluctuations by central banks, the study posits that interest rates will eventually return to the central bank’s intended fair value. The model’s estimation errors could be treated akin to bond value factors in global risk premia.

Negative Interest Rate Policies: A Survey

This article surveys studies on the impact of central bank negative interest rate policies (NIRP). It reviews recent research on the effects of NIRP on financial markets, banks, households, firms, and the macroeconomy. Overall, policy rate cuts when interest rates are negative propagated along the yield curve, with the first policy cut below zero contributing significantly to the fall in longer-term yields. Lending and deposit rates also decreased following the adoption of NIRP. Based on the experience so far, bank lending volumes rose, and bank profits did not significantly deteriorate, although there was considerable heterogeneity in the effects. The impact of NIRP on inflation and output appears to have been comparable to that of conventional interest rate cuts.

Negative interest rate policy and banks' earnings management

Using bank-level data from 35 OECD countries over the period 2011–2018, we examine the impact of the introduction of negative interest rate policy on banks' earnings management. Overall, our findings underscore the unintended positive consequence of unconventional economic policy and austerity measures aimed at stimulating the economy on the earnings quality of banks.

The formation of interbank interest rates and treasury bill yields in Japan under different regimes of non‐traditional monetary policy

AbstractInterbank interest rates and Treasury Bill (TB) yields of maturities of three and six months move together, but not 12 months, under a “quantitative and qualitative easing policy.” On the other hand, interbank interest rates and TB yields of maturities of 3, 6, and 12 months move together under a “negative interest rate policy.” Interbank and TB markets are partially integrated up to the 6‐month maturity as a short‐term money market under a “quantitative and qualitative easing policy,” while interbank and TB markets are integrated up to the 12‐month maturity as a short‐term money market under a “negative interest rate policy.” This indicates that the arbitrage of interbank and TB markets works. Practitioners of the interbank market are limited to financial institutions, but those of TB markets also include non‐financial institutions.

ПРОЦЕНТНА ПОЛІТИКА НАЦІОНАЛЬНОГО БАНКУ УКРАЇНИ ТА ЇЇ ВПЛИВ НА ЕКОНОМІКУ КРАЇНИ

An analysis of the interest rate policy of the National Bank of Ukraine implemented in the last decade is carried out, and its impact on Ukrainian economy is determined. It is concluded that approaches to interest rate policy that prove effective in one macroeconomic environment may have unintended consequences in another. It is determined that modern monetary and credit policy of the world’s leading countries, in contrast to domestic practice, is characterized by negative interest rate policy, which was introduced by central banks of many countries after the 2008 crisis for the deposits of commercial banks they attracted. It is substantiated that with the adoption of the Law of Ukraine "On the National Bank of Ukraine" in 2010, a gradual transformation of the regulator's policy began, which manifested, in particular, in shift of emphasis from exchange rate stability policy to price stabilization policy. Since then, the interest rate policy has been used exclusively as a tool for anti-inflation regulation, which in the conditions of macroeconomic environment instability and systemic shortcomings of the domestic economy proved ineffective. It is proven that with a systemic surplus of liquidity in the banking sector of Ukraine, tying the value of all monetary resources on the financial market to the NBU discount rate led to a rise in the rate on its deposit certificates and a significant increase in its mobilization operations. Significant volumes of the NBU mobilization operations and high rates for them caused the loss of incentives for the banking sector to lend to non-financial corporations and excessive expenses in government borrowing. Attention is focused on the fact that the current detachment of the banking sector from the needs of the economy may become a restraining factor in wartime and during post-war recovery of the country.

Trend of Chip Industry under the Negative Interest Rate Policy: Based on Time Series Model

On 7 October 2022, the US government issued a revised policy regarding semiconductor technology export toward China. The 139 pages of rules stated the regulation on export of chips, more specifically, the advanced computer chips that could support AI algorithms. In fact, this is not the first time for US government banning export of high-end computer chips to China, but this one could be the most expensive export restriction within a decade. Chinese chip companies have long suffered from the banning from US government, the development of the whole industry is filled with twists and turns as well, but the thriving of Chinese chip market is still deeply related to the US economy's performance. This paper discovers the correlation between the performance of Chinese chip industry, which is revealed by the index level of chip industry within China's mainland stock market, and the US to RMB exchange rate, starting from 2016 to present. The paper applied ARMA-GARCH model to predict and analyze the data, studying how will US exchange rate affect the development of chip industry in China. It also predicts the development of Chinese chip industry and then makes suggestions for future development of the Chinese chip companies.

Reversal interest rate and macroprudential policy

Could a monetary policy loosening in a low interest rate environment have unintended recessionary effects? Using a non-linear macroeconomic model fitted to the euro area economy, we show that the effectiveness of monetary policy can decline in negative territory until it reaches an endogenous turning point, where monetary policy becomes contractionary. The framework demonstrates that the risk of hitting the rate at which the effect reverses depends on the capitalization of the banking sector. The possibility of the reversal interest rate gives rise to a novel motive for macroprudential policy. We show that macroprudential policy in the form of a countercyclical capital buffer, which prescribes the build-up of buffers in good times, substantially mitigates the probability of encountering the reversal rate and increases the effectiveness of negative interest rate policies. This new motive emphasizes the strategic complementarities between monetary policy and macroprudential policy.

Does negative interest rate policy impact carbon emissions? Evidence from a quasi-natural experiment

Financial policy is an essential tool for achieving sustainable economic development and has been extensively studied in the environmental economics literature. This study employs panel data of 45 countries from 2007 to 2019 and a multi-period difference-in-differences (DID) method to investigate the mechanism and transmission path of negative interest rate policy on carbon dioxide emissions. The results indicate that the implementation of negative interest rate policy can significantly reduce CO2 emissions, and various robustness tests substantiate this result. Mechanism tests show that when the interest rate breaks the zero lower bound constraint, CO2 emissions can be reduced through the exchange rate channel, while the credit channel is blocked. Furthermore, the mitigation effect of negative interest rate policy varies with country heterogeneity, and countries with low comprehensive development, high economic growth, and high investment levels have more potential to control environmental degradation. The study evaluates the effects of negative interest rate policy from an environmental perspective, providing useful policy insights for monetary authorities to formulate effective policies to promote coordinated economic and environmental development.

Economic uncertainty, central bank digital currency, and negative interest rate policy

The COVID-19 outbreak has brought unprecedented social attention to economic uncertainty and negative interest rate policy (NIRP). How does uncertainty affect economic activity, and how effective is a NIRP based on central bank digital currency (CBDC)? To answer the two questions, we constructed a dynamic stochastic general equilibrium (DSGE) model that accommodates sticky prices and wages. The results indicated: (i) Economic uncertainty has substantially reduced investment, output, wage, and loans, which increases unemployment risk. In the short term, it has triggered impulsive consumption by households, while consumption has fallen into a slump in the long run. (ii) After suffering an uncertainty shock, the economy entered short-term stagflation and long-term deflation. The short-term stagflation was mainly caused by resident wage adjustment, and the long-term deflation was due to the decline in effective demand caused by unemployment risk. (iii) CBDC could eliminate the zero lower bound (ZLB) constraint, thereby improving the effectiveness of NIRP. Compared with traditional currency, CBDC-based NIRP could more effectively smooth macroeconomic fluctuations and alleviate the negative impact of an uncertainty shock, which is more conducive to restoring market confidence and promoting economic recovery.

The effectiveness of a negative interest rate policy

In a dynamic stochastic general equilibrium model that is calibrated for the euro area, a negative interest rate policy (NIRP) can have contractionary effects on the economy when interest rates on household deposits reach the zero lower bound, and such deposits are the only source of bank funding and household savings. However, by introducing additional assets to households’ portfolios and alternative sources of bank funding, such as bank bonds, the NIRP becomes expansionary. Because both features characterize the euro area well, they are essential to study the effectiveness of NIRP policies.

Negative Interest Rates and Its Impact on GDP, FDI and Banks’ Financial Performance: The Cases of Switzerland and Sweden

The article deals with the issue of how negative interest rate policies, introduced in the second decade of the 21st century in some countries, affect certain macroeconomic indicators and bank performance. We concentrate specifically on Switzerland and Sweden. We use correlation analysis to reveal the relationship between interest rates and GDP, the level of foreign direct investment (FDI) and some indicators of banks’ performance. We found that negative interest rates (NIRs) are strongly correlated with the level of GDP in both Switzerland and Sweden but that they do not affect their FDI. The share of banks´ deposits in GDP is also strongly correlated with NIR. Other indicators of bank performance do not show a strong correlation for both countries. Our evidence is consistent with NIR not being associated with undesirable effects concerning economic growth and bank performance in Switzerland and Sweden. The value of FDI depends on many factors—mainly on the attractiveness of a country for foreign investors in terms of its political and economic stability and by general conditions for business operation.

The effect of different periods of unconventional monetary policies on Japanese financial markets

PurposeThis study aims to examine to what extent the Japanese financial markets are affected by the four periods of unconventional monetary policies (UMP) implemented by the Bank of Japan from 2013 to 2020.Design/methodology/approachUsing the daily 10-year term spread as a proxy for monetary easing policy, this study uses four sub-sample periods from 2013 to 2020 to look into the effectiveness of UMP on the Japanese financial markets.FindingsOur result shows that not all of the Bank of Japan's unconventional monetary policies are equally effective in influencing the Japanese financial markets. In particular, the QQE policy implemented from April 2013 to October 2014 effectively influenced the stock market, banking sector and foreign exchange market. However, the financial market impact of monetary policy is muted during the QQE expansion period. Likewise, the QQE with a negative interest rate policy influences only the banking sector. Finally, the QQE with its yield curve control policy effectively impacts the financial markets.Research limitations/implicationsThis research can be expanded by studying the international spillover effect of the Bank of Japan's UMP on the financial markets in Asian countries.Practical implicationsThe findings of this study enable investors to understand the causal relationship between the Bank of Japan's UMP and the financial market indicators, thereby helping them to position their portfolio investments. From the policy perspective, the finding is useful to inform the Bank of Japan on which policy is relatively effective in affecting the financial markets. In light of the empirical finding, the Bank of Japan should continue to pursue the QQE YCCP or revert to the initial QQE policy, as the two policies are relatively more effective than the QQE expansion and QQE NIRP in affecting the Japanese financial markets.Social implicationsThe empirical finding highlights the importance of controlling for the impact of different QQE policies in the model. Future research may consider conducting sub-sample analysis to cater to the different QQE policy regimes. This approach provides a clearer picture and valid inferences on the financial market impact of each QQE policy.Originality/valueThis study provides a comprehensive analysis of the impact of Bank of Japan's QQE on the Japanese financial markets. For the market participants, the findings of this study suggest that investors should closely gauge the development of the unconventional monetary policies of the Bank of Japan because the monetary easing policy influences the decision-making process of commercial banks, pension funds, mutual funds, retail investors and other stakeholders in the financial markets. The policy twist will have future ramifications for their loan, investment and retirement fund portfolios.

Yield curve of Treasury Bills in Japan under different regimes of non‐traditional monetary policy

AbstractWhen the BOJ (Bank of Japan) adopted a “quantitative and qualitative easing policy,” zero bound restriction existed. The notion of market practitioners that the BOJ would not adopt a “negative interest rate policy” caused less volatility in the TB (Treasury Bill) market in comparison with a regime of a “negative interest rate policy.” After the BOJ decided to adopt a “negative interest rate policy,” zero bound restriction was lifted, and market practitioners expected that the policy rate decided by the BOJ might be lowered. This expectation gave room for TB yields to fluctuate more than before, and caused more volatility in the TB market under the regime of a “negative interest rate policy” than under one of a “quantitative and qualitative easing policy.” This is why the TB yield curve under a “negative interest rate policy” is driven by a single common trend with mutual causalities in all maturities. In other words, the normal transmission function of the TB yield curve is recovered by the introduction of a “negative interest rate policy.”

Macroeconomic Policy Assessment in an Era of Low Interest Rates -- The Case of Japan

How the macroeconomic policies adjust to stimulating economic development after the failure of conventional monetary policy with zero lower bound (ZLB) in the low interest rate era is one of the key topics of research today. Studies have been conducted to summarize or model single policies of macroeconomic policies in some countries since the beginning of the low-interest rate era, however, there is a lack of systematic assessment and generalization of the combination of macroeconomic policies. Therefore, this paper takes Japan as an example and starts from the IS-LM model, combining data on indicators of Japan's macroeconomic performance over the past decade to conduct a systematic assessment of the effectiveness and limitations of both monetary and fiscal policies. The study finds that Quantitative and Qualitative Monetary Easing (QQE), negative interest rate policy (NIRP) and flexible fiscal policy, which are innovative macroeconomic policies with ZLB, are effective in stimulating economic policies, but their long-term performance is poor due to a variety of domestic and international factors. Based on the results of the assessment, the paper also offers some insights into the implementation of macroeconomic policies in an era of low-interest rates.

Negative Interest Rate Policy and Economic Growth under Exchange Rate Misalignment

Negative Interest Rate Policy and Economic Growth under Exchange Rate Misalignment

Negative Interest Rate Policy and the Influence of Macro‐Economic News on Yields

AbstractWe consider the influence of domestic and U.S. macro‐economic news surprises on daily bond yields over the January 1999 to January 2018 period for four advanced negative interest rate policy (NIRP) economies—Germany, Japan, Sweden, and Switzerland. Our results suggest that the influence of macro‐economic news surprises is for all four countries under study during the NIRP period nonexistent or noticeably weaker than during the preceding zero interest rate policy (ZIRP) period. Our results are consistent with the suggestion that NIRP is characterized by a lower bound that is no less constraining than the zero‐lower bound that characterizes ZIRP.

Central bank digital currency and the effectiveness of negative interest rate policy: A DSGE analysis

Implementing a negative interest rate policy (NIRP) in the traditional fiat system is less effective than desired because of the zero lower bound (ZLB) constraint on interest rates and the cash barrier. Would this problem be solved if a new form of currency was introduced, i.e., central bank digital currency (CBDC), in the economy? To answer this question, we construct a dynamic stochastic general equilibrium (DSGE) model to analyze the effectiveness of NIRP upon the introduction of CBDC. The results suggest that: (i) The CBDC can eliminate the ZLB constraint and stabilize the economic fluctuations caused by NIRP. (ii) The central bank can implement NIRP by directly adjusting the interest rate of digital currency to stimulate consumption, investment, and output and to accelerate macroeconomic recovery. (iii) Welfare analysis shows that the central bank can effectively choose different NIRP rules according to the economic objectives.

Impact of negative interest rate policy on the swap market in Japan: Comparative analysis before and after yield curve control

AbstractNo co‐movement is found among swap rates with a maturity of 10, 15, 20, and 30 years before the introduction of yield curve control (YCC) under Negative Interest Rate Policy (NIRP). On the other hand, they co‐move after the introduction, driven by a single common trend. No single pair of swap rates move together before the introduction, but every pair move together after the introduction. The function of the swap market was lost after the introduction of NIRP. This caused uncertainties regarding the formation of the yield curve among the market participants in the super long zone of the swap market. After the Bank of Japan (BOJ) introduced YCC to move the yield curve upward, particularly in moving the 10‐year Japanese Government Bond (JGB) yield to around zero percent, structural changes took place not only in JGB but also in swap markets.

Should they stay or should they go? Negative interest rate policies under review

AbstractNegative interest rate policies (NIRP) have become an established monetary policy instrument in the toolkit of the ECB. We discuss NIRP in the euro area based on theoretical considerations and available empirical evidence. We find that NIRP had some positive impact on loan growth and investment in the euro area, but that the room to further loosen monetary policy via NIRP may be small. NIRP is discussed also in the context of the general monetary policy environment.

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

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.