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  4. January 2021
  5. Going Negative at the Zero Lower Bound: The Effects of Negative Nominal Interest Rates

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Going Negative at the Zero Lower Bound: The Effects of Negative Nominal Interest Rates

  • Mauricio Ulate
American Economic Review
vol. 111, no. 1, January 2021
(pp. 1–40)
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Abstract

After the Great Recession several central banks started setting negative nominal interest rates in an expansionary attempt, but the effectiveness of this measure remains unclear. Negative rates can stimulate the economy by lowering the rates that commercial banks charge on loans, but they can also erode bank profitability by squeezing deposit spreads. This paper studies the effects of negative rates in a new DSGE model where banks intermediate the transmission of monetary policy. I use bank-level data to calibrate the model and find that monetary policy in negative territory is between 60 and 90 percent as effective as in positive territory.

Citation

Ulate, Mauricio. 2021. "Going Negative at the Zero Lower Bound: The Effects of Negative Nominal Interest Rates." American Economic Review, 111 (1): 1–40. DOI: 10.1257/aer.20190848

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
  • E32 Business Fluctuations; Cycles
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E52 Monetary Policy
  • E58 Central Banks and Their Policies
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages