The Signalling Channel of Negative Interest Rates

63 Pages Posted: 11 Jan 2022

See all articles by Oliver de Groot

Oliver de Groot

University of Liverpool - Management School (ULMS)

Alexander Haas

University of Oxford - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: January 2022

Abstract

Negative interest rates remain a controversial policy for central banks. We study a novel signalling channel and ask under what conditions negative rates should exist in an optimal policymaker’s toolkit. We prove two necessary conditions for the optimality of negative rates: a time-consistent policy setting and a preference for policy smoothing. These conditions allow negative rates to signal policy easing, even with deposit rates constrained at zero. In an estimated model, the signalling channel dominates the costly interest margin channel. However, the effectiveness of negative rates depends sensitively on the degree of policy inertia, level of reserves, and ZLB duration.

Keywords: Monetary policy, Taylor rule, forward guidance, liquidity trap

JEL Classification: E44,E52,E61

Suggested Citation

de Groot, Oliver and Haas, Alexander, The Signalling Channel of Negative Interest Rates (January 2022). DIW Berlin Discussion Paper No. 1990, Available at SSRN: https://ssrn.com/abstract=4005895 or http://dx.doi.org/10.2139/ssrn.4005895

Oliver De Groot

University of Liverpool - Management School (ULMS) ( email )

Alexander Haas (Contact Author)

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, OX1 3UQ
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
126
Abstract Views
422
Rank
182,287
PlumX Metrics