Are Negative Nominal Interest Rates Expansionary?
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.
We are grateful to compricer.se and especially Christina Soderberg for providing and assisting with bank level interest rate data. We are also grateful to seminar and conference participants at Brown University, the University of Maryland, Bank of Portugal, the European Central Bank and John Shea, Larry Summers, Dominik Thaler and Michael Woodford for discussion. We thank INET for financial support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.