Negative Nominal Interest Rates and the Bank Lending Channel

59 Pages Posted: 7 Jan 2019

See all articles by Gauti B. Eggertsson

Gauti B. Eggertsson

Brown University - Department of Economics

Ragnar Juelsrud

Norges Bank

Larry Summers

Harvard University

Ella Wold

Brown University

Multiple version iconThere are 2 versions of this paper

Date Written: January 2019


Following the crisis of 2008, several central banks engaged in a new experiment by setting negative policy rates. Using aggregate and bank level data, we document that deposit rates stopped responding to policy rates once they went negative and that bank lending rates in some cases increased rather than decreased in response to policy rate cuts. Based on the empirical evidence, we construct a macro-model with a banking sector that links together policy rates, deposit rates and lending rates. Once the policy rate turns negative, the usual transmission mechanism of monetary policy through the bank sector breaks down. Moreover, because a negative policy rate reduces bank profits, the total effect on aggregate output can be contractionary. A calibration which matches Swedish bank level data suggests that a policy rate of -0.50 percent increases borrowing rates by 15 basis points and reduces output by 7 basis points.

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Suggested Citation

Eggertsson, Gauti B. and Juelsrud, Ragnar and Summers, Larry and Wold, Ella, Negative Nominal Interest Rates and the Bank Lending Channel (January 2019). NBER Working Paper No. w25416. Available at SSRN:

Gauti B. Eggertsson (Contact Author)

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

Ragnar Juelsrud

Norges Bank ( email )

Bankplassen 2
Oslo, 0151


Larry Summers

Harvard University ( email )

Ella Wold

Brown University

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