DP16236 The Effectiveness of a Negative Interest Rate Policy

Author(s): Marco Onofri, Gert Peersman, Frank Smets
Publication Date: June 2021
Keyword(s): Euro Area, monetary policy, Negative interest rate policy
JEL(s): E4, E5
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16236

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.