The signalling channel of negative interest rates

Oliver de Groot, Alexander Haas

Research output: Contribution to journalArticleResearchpeer-review

4 Citations (Scopus)

Abstract

Negative policy rates can convince markets that deposit rates will remain lower-for-longer, even when current deposit rates are constrained by zero. This is the signalling channel of negative interest rates. We analyse the optimality and effectiveness of negative rates in the context of this novel transmission channel. In a stylized model, we prove two necessary conditions for optimality: time-consistency and a preference for policy smoothing. In an estimated model, we show the signalling channel dominates banks’ costly interest margin channel. However, the effectiveness of negative rates depends sensitively on the degree of policy inertia, level of reserves, and ZLB duration.

Original languageEnglish
Pages (from-to)87-103
Number of pages17
JournalJournal of Monetary Economics
Volume138
DOIs
Publication statusPublished - Sept 2023
Externally publishedYes

Keywords

  • Forward guidance
  • Liquidity trap
  • Monetary policy
  • Taylor rule

Cite this