Banks, Low Interest Rates, and Monetary Policy Transmission

92 Pages Posted: 10 Feb 2020

See all articles by Olivier Wang

Olivier Wang

New York University (NYU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 30, 2018


This paper studies the effect of low interest rates on financial intermediation and the transmission of monetary policy. Using U.S. bank- and branch-level data, I document two new facts: first, the long-run decline in bond rates has not been fully passed through to loan rates; second, the short-run pass-through of policy rates to loan rates is lower at lower rates. To explain these facts, I build a model in which banks provide both credit and liquidity, and the nominal interest rate affects the composition of bank interest income between loan and deposit spreads. In the long run, a decline in the equilibrium real rate r* compresses deposit spreads but increases loan spreads. In the short run, the sensitivity of output to monetary shocks is dampened relative to a benchmark with perfect pass-through, and even more so the lower r* is: I find a dampening that grows from 20% to 32% as r* falls from 3% to -1%. A higher inflation target can redistribute from depositors to borrowers and enhance monetary policy transmission.

JEL Classification: E4, E5, G2

Suggested Citation

Wang, Olivier, Banks, Low Interest Rates, and Monetary Policy Transmission (December 30, 2018). NYU Stern School of Business, Available at SSRN: or

Olivier Wang (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States


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