NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Are Negative Nominal Interest Rates Expansionary?

Gauti B. Eggertsson, Ragnar E. Juelsrud, Ella Getz Wold

NBER Working Paper No. 24039
Issued in November 2017
NBER Program(s):Monetary Economics

Following the crisis of 2008 several central banks engaged in a radical new policy experiment by setting negative policy rates. Using aggregate and bank-level data, we document a collapse in pass-through to deposit and lending rates once the policy rate turns negative. Motivated by these empirical facts, we construct a macro-model with a banking sector that links together policy rates, deposit rates and lending rates. Once the policy rates turns negative the usual transmission mechanism of monetary policy breaks down. Moreover, because a negative interest rate on reserves reduces bank profits, the total effect on aggregate output can be contractionary.

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Document Object Identifier (DOI): 10.3386/w24039

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