Reversal Interest Rate and Macroprudential Policy

56 Pages Posted: 10 Nov 2020

See all articles by Matthieu Darracq Paries

Matthieu Darracq Paries

European Central Bank (ECB)

Christoffer Kok

European Central Bank (ECB)

Date Written: November, 2020

Abstract

Could a monetary policy loosening entail the opposite effect than the intended expansionary impact in a low interest rate environment? We demonstrate that the risk of hitting the rate at which the effect reverses depends on the capitalization of the banking sector by using a non-linear macroeconomic model calibrated to the euro area economy. The framework suggests that the reversal interest rate is located in negative territory of around −1% per annum. The possibility of the reversal interest rate creates a novel motive for macroprudential policy. We show that macroprudential policy in the form of a countercyclical capital buffer, which prescribes the build-up of buffers in good times, can mitigate substantially the probability of encountering the reversal rate, improves welfare and reduces economic fluctuations. This new motive emphasizes also the strategic complementarities between monetary policy and macroprudential policy.

JEL Classification: E32, E44, E52, E58, G21

Suggested Citation

Darracq Paries, Matthieu and Kok, Christoffer, Reversal Interest Rate and Macroprudential Policy (November, 2020). ECB Working Paper No. 20202487, Available at SSRN: https://ssrn.com/abstract=3727928 or http://dx.doi.org/10.2139/ssrn.3727928

Matthieu Darracq Paries (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+496913446631 (Phone)
+496913447604 (Fax)

Christoffer Kok

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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