On the negatives of negative interest rates and the positives of exemption thresholds

Aleksander Berentsen, Hugo van Buggenum and Romina Ruprecht

No 372, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: Major central banks remunerate reserves at negative interest rates and it is increasingly likely that they will keep rates negative for many more years. To study the long run implications of negative rates, we construct a dynamic general equilibrium model with commercial banks funding investment projects and a central bank issuing reserves. Negative rates distort investment decisions resulting in lower output and welfare. These findings sharply contrast the short-run expansionary effects ascribed to negative rate policies by most of the existing literature. Negative rates also reduce commercial bank profitability. Exempting a fraction of reserves from negative rates can resolve profitability concerns without affecting the central bank's ability to control the money market rate. However, exemption thresholds do no mitigate the investment distortions created by negative rates.

Keywords: Negative interest rate; money market; monetary policy; interest rates (search for similar items in EconPapers)
JEL-codes: E40 E42 E43 E50 E58 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:372

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