The signalling channel of negative interest rates

de Groot, Oliver ORCID: 0000-0002-6853-1129 and Haas, Alexander (2023) The signalling channel of negative interest rates. Journal of Monetary Economics, 138. pp. 87-103.

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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.

Item Type:	Article
Uncontrolled Keywords:	Monetary policy, Taylor rule, Forward guidance, Liquidity trap
Divisions:	Faculty of Humanities and Social Sciences > School of Management
Depositing User:	Symplectic Admin
Date Deposited:	14 Jun 2023 10:20
Last Modified:	18 Oct 2023 22:24
DOI:	10.1016/j.jmoneco.2023.05.011
Related URLs:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3170869