Discussion Paper Details

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Title: The Effectiveness of a Negative Interest Rate Policy

Author(s): Marco Onofri, Gert Peersman and Frank Smets

Publication Date: June 2021

Keyword(s): Euro Area, monetary policy and Negative interest rate policy

Programme Area(s): Monetary Economics and Fluctuations

Abstract: We analyze the effectiveness of a Negative Interest Rate Policy (NIRP) in a quantitative Dynamic Stochastic General Equilibrium model for the euro area with a financial sector. Similarly to other studies in the literature, we show that a NIRP can have a contractionary effect on the economy when there is a zero lower bound on the interest rate of household deposits, and such deposits are the only source of bank funding and household savings. However, we show that the contractionary effects vanish and the NIRP becomes expansionary when we allow for additional assets in the savings portfolio of households, and when we introduce alternative sources of bank funding in the model, such as bank bonds. These two features, which characterize the euro area very well, are hence essential to study the effectiveness of a NIRP.

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Bibliographic Reference

Onofri, M, Peersman, G and Smets, F. 2021. 'The Effectiveness of a Negative Interest Rate Policy'. London, Centre for Economic Policy Research.