On the Negatives of Negative Interest Rates and the Positives of Exemption Thresholds

University of Zurich, Department of Economics, Working Paper No. 372, December 2020

61 Pages Posted: 13 Jan 2021

See all articles by Aleksander Berentsen

Aleksander Berentsen

University of Basel - Faculty of Business and Economics; CESifo (Center for Economic Studies and Ifo Institute)

Hugo van Buggenum

ETH Zürich; Tilburg University - Tilburg University School of Economics and Management

Romina Ruprecht

University of Basel

Date Written: December 16, 2020

Abstract

Major central banks remunerate reserves at negative interest rates and it is increasingly likely that they will keep rates negative for many more years. To study the long run implications of negative rates, we construct a dynamic general equilibrium model with commercial banks funding investment projects and a central bank issuing reserves. Negative rates distort investment decisions resulting in lower output and welfare. These findings sharply contrast the short-run expansionary effects ascribed to negative rate policies by most of the existing literature. Negative rates also reduce commercial bank profitability. Exempting a fraction of reserves from negative rates can resolve profitability concerns without affecting the central bank's ability to control the money market rate. However, exemption thresholds do no mitigate the investment distortions created by negative rates.

Keywords: Negative interest rate, money market, monetary policy, interest rates

JEL Classification: E40, E42, E43, E50, E58

Suggested Citation

Berentsen, Aleksander and van Buggenum, Hugo and Ruprecht, Romina, On the Negatives of Negative Interest Rates and the Positives of Exemption Thresholds (December 16, 2020). University of Zurich, Department of Economics, Working Paper No. 372, December 2020, Available at SSRN: https://ssrn.com/abstract=3752629 or http://dx.doi.org/10.2139/ssrn.3752629

Aleksander Berentsen (Contact Author)

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Hugo Van Buggenum

ETH Zürich ( email )

Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Romina Ruprecht

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

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