On the Negatives of Negative Interest Rates

Berentsen, Aleksander; Ruprecht, Romina; van Buggenum, Hugo

doi:10.17016/FEDS.2023.064

Working Paper

On the Negatives of Negative Interest Rates

Abstract: Major central banks remunerate reserves at negative rates (NIR). To study thelong-run effects of NIR, we focus on the role of reserves as intertemporal stores of value that are used to settle interbank liabilities. We construct a dynamic general equilibrium model with commercial banks holding reserves and funding investments with retail deposits. In the long run, NIR distorts investment decisions, lowers welfare, depresses output, and reduces bank profitability. The type of distortion depends on the transmission of NIR to retail deposits. The availability of cash explains the asymmetric effects of policy-rate changes in negative vs positive territory.

Keywords: Monetary policy; Interest rates; Money market; Negative interest rate;

JEL Classification: E40; E42; E43; E50; E58;

https://doi.org/10.17016/FEDS.2023.064