Central Banking Below Zero: The Implementation of Negative Interest Rate Policies in Europe and Japan

Abstract

We provide an overview of the operational implementation of negative interest rates in Europe and Japan, drawing attention to the fact that there is precedent for negative policy rates and negative money market rates. We then address conceptual issues and summarize measures which define negative interest rate policies. Based on detailed institutional analyses and an examination of the interaction of negative interest rate policies with balance sheet policies, we argue that there is substantial heterogeneity in the purpose, design, and operational specificities of negative interest rate policies across economies, with significant consequences for effective money market rates, private sector funding conditions, and expectations. Finally, summarizing transmission channels of negative rates to the real economy and their potential benefits and risks, we call attention to potential adverse effects resulting from the interaction of negative interest rate policies with tighter liquidity and capital standards adopted since the Global Financial Crisis.

Keywords: central banking, negative interest rate policies, negative policy rates, monetary policy transmission, monetary policy effectiveness, regulation

JEL Classification: E5, E52, E58