Negative Nominal Interest Rates Research Articles

Unconventional policies in state-dependent liquidity traps

We characterize optimal unconventional monetary and fiscal-financial policies against supply- and demand-driven liquidity traps within a tractable New Keynesian model featuring a cash-in-advance constraint and a monetary policy cost channel. Deposit subsidies circumvent the inflation-output trade-off arising from stagflationary shocks and supply-driven liquidity traps by enabling negative nominal interest rates. Additionally, deposit taxes facilitate modest interest rate hikes to escape demand-driven deflationary traps. Notably, discretionary and commitment policies with deposit taxes / subsidies deliver virtually equivalent welfare gains, rendering time-inconsistent forward guidance schedules unnecessary. We also derive robust and implementable optimal policy rules when the sources of shocks are unknown.

A simple model of a central bank digital currency

We develop a general equilibrium model that highlights the trade-offs between physical and digital forms of retail central bank money. The key differences between cash and central bank digital currency (CBDC) include transaction efficiency, possibilities for tax evasion, and, potentially, nominal rates of return. We establish conditions under which cash and CBDC can co-exist and show how government policies can influence relative holdings of cash, CBDC, and other assets. We illustrate how a CBDC can facilitate negative nominal interest rates and helicopter drops, and also how a CBDC can be structured to prevent capital flight from other assets.

Negative Nominal Interest Rates and the Bank Lending Channel

Abstract We investigate the bank lending channel of negative nominal policy rates from an empirical and theoretical perspective. For the empirical results, we rely on Swedish data, including daily bank-level lending rates. We find that retail household deposit rates are subject to a lower bound (DLB). Empirically, once the DLB is met, the pass-through to mortgage 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.

The Transmission of Negative Nominal Interest Rates in Finland

Despite the implementation of negative nominal interest rates by several advanced economies in the last decade and the many papers that have been written about this novel policy tool, there is still much we do not know about the effectiveness of this instrument. The pass-through of negative policy rates to loan rates is one of the main points of contention. In this paper, we analyze the pass-through of the ECB’s changes in the deposit facility rate to mortgage rates in Finland between 2005 and 2020. We use monthly data and three different empirical methodologies: correlational event studies, high-frequency identification, and exposure-measure regressions. We provide robust evidence that there continues to be pass-through of a cut in the policy rate to mortgage rates even when the policy rate is in negative territory, but that this pass-through is smaller than when the policy rate is in positive territory. The evidence in this paper contrasts with some previous studies and provides moments that can be useful to discipline theoretical negative-rates models.

The Transmission of Negative Nominal Interest Rates in Finland

The Transmission of Negative Nominal Interest Rates in Finland

Making Sense of Negative Nominal Interest Rates

Several advanced economies implemented negative nominal interest rates in the middle of the last decade, seeking to provide further monetary accommodation once cuts in positive territory had been exhausted. Negative rates affect banks in novel ways, mostly because during times of negative policy rates the interest rate that banks pay households on their deposits usually remains close to zero. In this review, we analyze the large literature that studies the impact of negative nominal interest rates, proceeding in four steps. First, we explain the theoretical channels through which negative rates affect banks. Second, we discuss the empirical findings about bank outcomes under negative rates. Third, we describe the aggregate transmission channels that influence the macroeconomic implications of a policy rate cut in negative territory. Finally, we compare the general-equilibrium models that have been used to quantify the effectiveness of negative rates and highlight why they have obtained mixed results. We conclude that, if properly implemented, negative rates are a valuable tool that central banks should not discard outright. However, negative rates can have quantifiable costs for the financial sector, and their effectiveness is likely to decline if implemented for long periods.

The Impact of Nominal Negative Interest Rates on the Economy – Literature Review

Until recently, negative nominal interest rates of the central bank were in the sphere of theoretical considerations. In 2009, the Swedish Central Bank was the first to implement a negative interest rate policy (NIRP). Since then, the NIRP has been implemented by the National Bank of Denmark, the European Central Bank, the Swiss National Bank and the National Bank of Japan. Unfortunately, due to the large number of simultaneous factors affecting the economy, it is extremely difficult to determine the long-term effects of NIRP implementation. Furthermore, the magnitude of the impact and the global extent of the coronavirus pandemic would have a significant impact on the dilatation, so the focus was on pre-pandemic issues. This paper is a literature review and it aims to synthetize information about the impact of negative interest rates on the market – in financial and real spheres. In this paper, both the results of scientific research and the opinions of experts were used, then the impact of negative nominal interest rates on the financial and real sectors was assessed. The results show that most authors highlight an adverse impact of negative interest rates on the stability of the banking sector regardless of the country. The greatest fear of the NIRP implementation by central banks is that the potential behavior of economic entities cannot be predicted with certainty, especially when it comes to cash deposit withdrawals from banks.

EU Governments Must not Return to Their Dysfunctional Fiscal Rules

Abstract Fiscal rules such as the European Stability and Growth Pact and the German debt brake have been suspended in the Covid19-pandemic in order to provide emergency measures and to overcome the crisis. Now, the controversial debate is back again: When should governments return to fiscal rules? Should they return to fiscal rules, at all? This article argues that it is not so much a question whether governments should return to fiscal rules at all, but to which kind of rules they should return. Following the deficit bias argument and the need for fiscal policy coordination in a monetary union some kind of limitation for government debt and some kind of fiscal rules may easily be justified. However, that does not mean that governments should return exactly to the previously existing rules, because these are economically flawed. Recently the argument for reform has become even stronger due to new empirical evidence about the macroeconomic effectivity of fiscal policy, the experience of the dysfunctionality of the existing rules during the Euro crisis and the fact that the cost of public debt has been reduced dramatically because of persistently low if not negative nominal interest rates.

How Does Monetary Policy Affect Income Inequality? Evidence from Europe

The issue of inequalities has become increasingly important in recent decades. Although distributional effects, such as inequalities, are commonly associated with globalisation and fiscal policy processes, many of the side effects of the exceptionally loose monetary policy of the last decade also affect the issue. After identifying the mechanisms and channels linking the field of monetary policy and inequality, the research focuses on empirical analyses. The research is based on a panel ARDL test focusing on the 19 Euro area countries and Denmark, Sweden and Switzerland, where negative nominal interest rates have been applied. The research includes the period of 2008–2018. The aim of the paper is to assess how certain monetary policy indicators affect inequality. The main conclusion is consistent with the existing literature: the effect of monetary policy to inequalities is modest, however not negligible. The effect of inflation seems to be weak; however, the rise in unemployment rate and long term interest rates negatively affect inequalities. The positive effects of the rising GDP per capita are also proven by the analysis.

Currency Wars? Unconventional Monetary Policy Does Not Stimulate Exports

AbstractI investigate whether countries that use unconventional monetary policy (UMP) experience export booms. I use a popular gravity model of trade which requires neither the exogeneity of UMP, nor instrumental variables for UMP. In practice, countries that engage in UMP experience a drop in exports vis‐à‐vis countries that are not engaged in such policies, holding other things constant. Quantitative easing is associated with exports that are about 10% lower to countries not engaged in UMP; this amount is significantly different from zero and similar to the effect of negative nominal interest rates. Thus, there is no evidence that countries have gained export markets through UMP; currency wars that have been launched have also been lost. UMP is also associated with a comparable drop in imports and exchange rates, suggesting that countries engage in UMP when they are experiencing adverse macroeconomic shocks concurrent with those that eviscerate international trade.

Keep the faith in banking: New evidence for the effects of negative interest rates based on the case of Finnish cooperative banks

This paper analyses the profitability of Finnish cooperative banks during the period of negative nominal interest rates. Contrary to expectations, the continuous decline in money market interest rates between 2009 and 2014, and the following negative rate era, did not have adverse effects on the profitability of banks at the beginning of negative interest rate period. Based on especially using a risk-adjusted measure for bank profitability, these results contrast with previous findings. In our findings, the increasing wholesale funding (WSF) ratio seems to be an important factor. However, after 2017 the banks have not been able to improve especially their risk-adjusted profitability so strongly anymore, because the WSF and the development of other than net interest margin returns have been in negative connection to it. In addition, the unconventional monetary policy actions seem not to improve profitability in the most recent observations of our data. These results raise serious concerns for the future of bank profitability during the prolonged period of negative interest rates.

Ujemne stopy procentowe a inwestycje w nieruchomości w świetle teorii Silvia Gesella

Objective: The article discusses a somewhat forgotten theory of the German economist Silvio Gesell concerning money free from interest, and even charged for its possession, i.e. the Gesell tax. The article presents the escape from money and whether investment in real estate is justified, as well as the limitations of such investment.Research Design & Methods: The author analyses the subject literature. The theoretical issues presented in S. Gesell’s source works were interpreted in the light of contemporary economic processes and theoretical studies on his work.Findings: One of the modern expressions of Gesell’s theory is negative nominal interest rates, which have become a contemporary policy tool. While until recently even the theoretical application of such a tool was rarely considered, it has now become an important consideration in the economic reality of many economies. The natural defence of those with savings is to flee money that is burdened with fees. Real estate investment is an alternative vehicle to cash, though it is not without its limitations.Implications / Recommendations: Negative nominal interest rates have become a monetary policy tool, and there are indeed conditions that justify their use. However, it is natural for those with free cash to run away from “taxed” negative cash flows into investments that will maintain the value of their capital. One such investment is investing in real estate, though it is not without its limitations.Contribution: The author discusses the Gesell tax, a rarely analysed theory that has a contemporary, practical expression. He links it with real estate, a subject that is widely discussed today.

Is the negative interest rate policy effective?

This paper examines the effectiveness of the negative interest rate policy conducted by several central banks to stabilize economic growth and inflation expectations through the signaling channel. In doing so, we assess survey-based expectations data for up to 44 economies from 2002 to 2017 and analyze the impact of the adoption of a negative interest rate policy on expectations made by professionals based on a difference-in-differences approach. Our main findings are as follows: First, we show that the introduction of negative policy rates significantly reduces expectations regarding 3-month money market interest rates and also 10-year government bond yields. Second, we also provide evidence for a significantly positive effect of this unconventional monetary policy tool on GDP growth and inflation expectations. This implies that the negative interest rate policy appears to be effective in boosting economic growth and overcoming a deflationary spiral. Consequently, the effect of negative nominal interest rates on real interest rate expectations is also negative.

Особенности денежно-кредитной политики в условиях низких ставок (Features of monetary policy at low rates)

Russian Abstract: В данной работе анализируется ряд монетарных правил, позволяющих снизить вероятность столкновения экономики с нулевой нижней границей процентной ставки. К ним относятся интегральная стабилизация, таргетирование номинального ВВП, уровня цен, номинальной ставки процента, повышенного уровня инфляции, введение отрицательной номинальной ставки процента и другие методы. Также рассматриваются дискреционные меры, используемые центральными банками в непосредственной близости номинальных процентных ставках к нулю, такие как резкое предупредительное сокращение ключевой ставки и интервенции на открытом рынке с целью сокращения долгосрочных процентных ставок. С помощью анализа современных экономико- математических моделей показывается эффективность таких монетарных правил как таргетирование номинального ВВП и уровня цен в предотвращении падения номинальной ставки процента до нуля, в первую очередь, благодаря эффективному управлению ожиданиями населения, что является слабой стороной дискреционного вмешательства. English Abstract: The paper analyses a number of monetary rules helping to decrease the probability of the nominal interest rate hitting the zero lower bound. Such measures include integral stabilization, NGDP targeting, price level targeting, raising the inflation target, introducing negative nominal interest rates etc. Discretion such as sharp preventive drop in the interest rate and LSAP to “lower for longer” are also considered. According to up-to-date New-Keynesian general equilibrium models, the major advantage of rules such as NGDP and price level targeting is their capacity to prevent zero lower bound episodes mainly by managing expectations of the public efficiently, which is a drawback of discretionary policy.

Why have negative nominal interest rates had such a small effect on bank performance? Cross country evidence

We explore the impact of negative policy rates on banks using data on 5200 banks from 27 advanced European and Asian countries, 2010–2017. Our cross-country panel specification allows us to condition on global shocks and bank-specific fixed effects. Banks offset interest income losses under negative rates with lower deposit expenses and gains in non-interest income, including fees and capital gains. Small and low deposit-ratio banks drive most results. Banks respond to negative rates by increasing lending activity and raising their share of deposit funding. Overall, our results indicate benign implications of negative rates to date for bank profitability.

Ultra-Low Interest Rates: Risk Measurement/Assessment and Macroprudential Political Economy

After recalling the quantitative relevance as of end-2019 of “new normal” ultra-low interest rates at world level, a brief discussion is offered of key areas of economic analysis and policy critically impacted by negative nominal interest rates. Specific reference is made to the following points. Risk modelling/measurement and the Basel risk-weighted capital framework. The operational viability of banks and insurance companies and the growth of leveraged loans. The liquidity trap revisited and the risk of illiquidity. Secular stagnation and the savings glut: the role of monetary policy. Political economy in the EA: a macro-prudential network perspective to prevent systemic risk. The case for infrastructure investment. On the basis of the arguments presented, it is argued, in the concluding remarks, that the costs of prolonged primary reliance on monetary expansion and sub-zero interest rates outweigh the benefits. A more balanced policy approach is outlined, with a view to improving the functioning of the Eurozone, enlarging the policy space, and reducing financial vulnerabilities.

Особенности денежно-кредитной политики в условиях низких ставок

Introduction. The paper considers a wide range of monetary policy rules: integral stabilization, NGDP targeting, price level targeting, raising the inflation target, introducing negative nominal interest rates etc. The author also considers discretionary policy used by central banks when the nominal rate is close to zero, such as dramatic preventive cut of the key interest rate and interventions in the open markets with the aim of cutting long-term interest rates. The relevance of this problem is supported by global long-term macroeconomic and demographic factors, such as the dynamics of oil prices and the aging of the population. The aim of the paper is to identify the most effective monetary policy rules in order to reduce the risk of a nominal interest rate falling to zero. Methods. Analysis of the background and the results of general equilibrium models modeling monetary policy is carried out. Analysis of the role of current global trends (based on statistics) in aggravating the problem of declining interest rates. Scientific novelty of the research. The author systematizes the conclusions of modern macroeconomic theory, which offers a number of monetary rules making it possible to reduce the likelihood of falling into the zero bound of interest rate. Results. The effectiveness of monetary rules such as targeting nominal GDP and price levels in preventing the nominal interest rate from falling to zero is shown, primarily due to more efficient public expectations management which is a weak point of discretionary intervention. Conclusions. Under the current global factors for many developed countries and some oil-exporters, the downward trend in nominal rates persists. Combined with slowdown in economic growth, such threat may have negative consequences for the Russian economy. In this case, it seems reasonable to stick to the inflation target above 2% per year and in the future to consider switching to targeting the price level or nominal GDP.

The case for cash

Abstract Cash is an extremely useful social contrivance. Kenneth Rogoff, who calls for phasing-out high denomination cash over time, recently discussed two possible drawbacks of high-denomination cash: the extensive use of high-denomination cash in crime and in illicit and corrupt activities and the role cash plays in preventing deeply negative nominal interest rates imposed on bank accounts. I will argue that using cash is preferable to the alternative, which entails worse types of crimes committed in the absence of cash. Consequently, the current high-denomination cash in the U.S. should be retained.

Negative Nominal Interest Rates Can Worsen Liquidity Traps

Can central banks use negative nominal interest rates to overcome the adverse effects of the zero lower bound? I show that negative rates are likely to be counterproductive in an expectations-driven liquidity trap. In a liquidity trap, firms expect low demand and cut prices, which leads the central bank to reduce nominal rates to their lower bound. If the resulting decline in real rates is not enough to stabilize demand, then the pessimism of price setters is fulfilled. Theoretically, the effect of a negative nominal rate is non-monotonic: a marginally negative rate is not enough to escape the liquidity trap, but allows for more pessimistic expectations and deflation, while a sufficiently negative rate eliminates the trap altogether. However, plausible estimates of the cost and benefits of price adjustments in the U.S. suggest that negative rates are contractionary in a liquidity trap, even at ?100 percent.

Negative Nominal Interest Rates Can Worsen Liquidity Traps

Can central banks use negative nominal interest rates to overcome the adverse effects of the zero lower bound? I show that negative rates are likely to be counterproductive in an expectations-driven liquidity trap. In a liquidity trap, firms expect low demand and cut prices, which leads the central bank to reduce nominal rates to their lower bound. If the resulting decline in real rates is not enough to stabilize demand,then the pessimism of price setters is fulfilled. Theoretically, the effect of a negative nominal rate is non-monotonic: a marginally negative rate is not enough to escape the liquidity trap, but allows for more pessimistic expectations and deflation, while a sufficiently negative rate eliminates the trap altogether. However, plausible estimates of the cost and benefits of price adjustments in the U.S. suggest that negative rates are contractionary in a liquidity trap, even at - 100 percent.