Negative Interest Rate Policies: Sources and Implications

74 Pages Posted: 16 Aug 2016

See all articles by Carlos Arteta

Carlos Arteta

World Bank, Development Prospects Group

M. Ayhan Kose

World Bank; Brookings Institution; Centre for Economic Policy Research (CEPR); Australian National University (ANU)

Marc Stocker

World Bank

Temel Taskin

World Bank

Multiple version iconThere are 3 versions of this paper

Date Written: August 2016

Abstract

Against the background of continued growth disappointments, depressed inflation expectations, and declining real equilibrium interest rates, a number of central banks have implemented negative interest rate policies (NIRP) to provide additional monetary policy stimulus over the past few years. This paper studies the sources and implications of NIRP. We report four main results. First, monetary transmission channels under NIRP are conceptually analogous to those under conventional monetary policy but NIRP present complications that could limit policy effectiveness. Second, since the introduction of NIRP, many of the key financial variables have evolved broadly as implied by the standard transmission channels. Third, NIRP could pose risks to financial stability, particularly if policy rates are substantially below zero or if NIRP are employed for a protracted period of time. Potential adverse consequences include the erosion of profitability of banks and other financial intermediaries, and excessive risk taking. However, there has so far been no significant evidence that financial stability has been compromised because of NIRP. Fourth, spillover implications of NIRP for emerging market and developing economies are mostly similar to those of other unconventional monetary policy measures. In sum, NIRP have a place in a policy makerâ's toolkit but, given their domestic and global implications, these policies need to be handled with care to secure their benefits while mitigating risks.

Keywords: developing countries, emerging markets, event study, financial stability, negative yields, quantitative easing; bank profitability, Unconventional Monetary Policy

JEL Classification: E52, E58, E60

Suggested Citation

Arteta, Carlos and Kose, M. Ayhan and Stocker, Marc and Taskin, Temel, Negative Interest Rate Policies: Sources and Implications (August 2016). CEPR Discussion Paper No. DP11433, Available at SSRN: https://ssrn.com/abstract=2823458

Carlos Arteta (Contact Author)

World Bank, Development Prospects Group ( email )

1818 H Street, NW
Washington, DC 20433
United States

M. Ayhan Kose

World Bank

1818 H Street, NW
Washington, DC 20433
United States

Brookings Institution

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Australian National University (ANU)

Canberra, Australian Capital Territory 2601
Australia

Marc Stocker

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Temel Taskin

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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