Negative Nominal Interest Rates and the Bank Lending Channel

60 Pages Posted: 15 Feb 2019 Last revised: 18 Feb 2019

See all articles by Gauti B. Eggertsson

Gauti B. Eggertsson

Brown University - Department of Economics

Ragnar Juelsrud

BI Norwegian Business School - Department of Economics

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Ella Getz Wold

Brown University

Multiple version iconThere are 2 versions of this paper

Date Written: January 18, 2019

Abstract

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.

Suggested Citation

Eggertsson, Gauti B. and Juelsrud, Ragnar and Summers, Lawrence H. and Getz Wold, Ella, Negative Nominal Interest Rates and the Bank Lending Channel (January 18, 2019). Norges Bank Working Paper 4/2019; ISBN 978-82-8379-071-9 . Available at SSRN: https://ssrn.com/abstract=3334966 or http://dx.doi.org/10.2139/ssrn.3334966

Gauti B. Eggertsson

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

Ragnar Juelsrud (Contact Author)

BI Norwegian Business School - Department of Economics ( email )

Nydalsveien 37
Oslo, 0484
Norway

HOME PAGE: http://ragnar.juelsrud.no

Lawrence H. Summers

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States
617-495-1502 (Phone)
617-495-8550 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Ella Getz Wold

Brown University ( email )

Box 1860
Providence, RI 02912
United States

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