Negative Nominal Rates Research Articles

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.

Why Have Negative Nominal Interest Rates Had Such a Small Effect on Bank Performance? Cross Country Evidence

We examine the effect of negative nominal interest rates on bank profitability and behavior using a cross-country panel of over 5,100 banks in 27 countries. Our data set includes annual observations for Japanese and European banks between 2010 and 2016, which covers all advanced economies that have experienced negative nominal rates, including currency union members as well as both fixed and floating exchange rates countries. When we compare negative nominal interest rates with low positive rates, banks experience losses in interest income that are almost exactly offset by savings on deposit expenses and gains in non-interest income, including capital gains on securities and fees. We find heterogeneous effects of negative rates: banks from regimes with floating exchange rates, small banks, and banks with low deposit ratios drive most of our results. Low-deposit banks have enjoyed particularly striking gains in non-interest income, likely from capital gains on securities. There have only been modest differences between high and low deposit-ratio banks’ changes in interest expenses; high deposit banks do not seem disproportionately vulnerable to negative rates. Banks also responded to negative rates by increasing lending activity, and raising the share of deposit funding. Overall, our results indicate surprisingly benign implications of negative rates for commercial banks thus far.

Exchange rate behaviour with negative interest rates: Some early negative observations

AbstractThis paper examines exchange rate behaviour during the recent period with negative nominal interest rates. We use a daily panel of data of 61 currencies from January 2010 to May 2016; during this time five economies (Denmark, EMU, Japan, Sweden and Switzerland) experienced negative nominal interest rates. We examine both effective exchange rates and bilateral rates, the latter typically measured against the Swiss franc because Switzerland has had the longest period of negative nominal rates. We examine exchange rate volatility, exchange rate changes, deviations from uncovered interest parity, and profits from the carry trade. We find that negative interest rates seem to have little effect on observable exchange rate behaviour.

The Side Effects of Safe Asset Creation

We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safety widens spreads, causing the ZLB to bind and increasing unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate, and restoring full employment. This entails permanently lower investment which reduces welfare, since our economy is dynamically efficient even when the natural rate is negative. Despite this, increasing debt is optimal if alternative instruments are unavailable. Alternative policies which permit negative real interest rates - higher inflation targets, negative nominal rates - achieve full employment without reducing investment.

The Effects of Negative Nominal Rates on the Pricing of American Calls: Some Theoretical and Numerical Insights

The article investigates the effects played on options pricing by negative risk-free rates when the underlying is an equity with null dividends. In such anomalous conditions, in fact, the fair value at early exercise of the American Call would not match the value of the European Call with the same financial features. We originally motivate this assumption with theoretical arguments. We then move to an empirical investigation where we put at work some quasi-closed formulas for pricing an American option and the stochastic trinomial trees algorithm. We then draw the conclusion that from a numerical viewpoint, the bias between the fair value of the American Call and the value of the corresponding. European Call is mainly due to approximation errors, which can be mitigated when Trinomial Stochastic Trees are used.

Taux négatif : arme de poing ou signal de détresse ?

Les taux nominaux négatifs, dont bénéficient actuellement certains emprunteurs souverains, ainsi que les banques qui se refinancent auprès de banques centrales ayant opté pour des taux directeurs négatifs ont fait voler en éclat l’hypothèse d’un plancher zéro. Bien qu’ils étendent a priori les marges de manœuvre de la politique monétaire, les taux négatifs sont-ils une conséquence voulue et maîtrisée de la politique monétaire de gestion de crise ou, bien davantage, un symptôme de la déflation, un indicateur de gravité de la situation macroéconomique, voire le signe avant-coureur d’un phénomène de stagnation séculaire ? La reprise ne dépend-elle pas moins du taux nominal monétaire que du taux de rentabilité des investissements productifs, c’est-à-dire du taux naturel au sens de Wicksell ? Ce retour à l’approche wicksellienne du taux d’intérêt naturel conduit à se demander si pour écarter le risque déflationniste qui persiste et repousser la perspective d’une stagnation séculaire, il faut mieux agir sur le taux monétaire en le baissant toujours plus ou sur le taux naturel en essayant de le relever. Auquel cas, comment relever le taux naturel ? Classification JEL : E31, E43, E52, E58.

Interest Rates as Options

ABSTRACTSince people can hold currency at a zero nominal interest rate, the nominal short rate cannot be negative. The real interest rate can be and has been negative, since low risk real investment opportunities like filling in the Mississippi delta do not guarantee positive returns. The inflation rate can be and has been negative, most recently (in the United States) during the Great Depression. The nominal short rate is the “shadow real interest rate” (as defined by the investment opportunity set) plus the inflation rate, or zero, whichever is greater. Thus the nominal short rate is an option. Longer term interest rates are always positive, since the future short rate may be positive even when the current short rate is zero. We can easily build this option element into our interest rate trees for backward induction or Monte Carlo simulation: just create a distribution that allows negative nominal rates, and then replace each negative rate with zero.

Interest Rates as Options

Since people can hold currency at a zero nominal interest rate, the nominal short cannot be negative. The real interest can be and has been negative, since low risk real investment opportunities, like filling in the Mississippi delta, do not guarantee positive returns. The inflation can be and has been negative, most recently (in the U.S.) during the Great Depression. The nominal short is the shadow real interest rate (as defined by the investment opportunity set) plus the inflation rate, or zero, whichever is greater. Thus the nominal short is an option. Longer term interest rates are always positive, since the future short may be positive even when the current short is zero. We can easily build this option element into our interest trees for backward induction or Monte Carlo simulation: just create a distribution that allows negative nominal rates, and then replace each negative with zero.