Job market paper

Title: Transmission of Negative Interest Rates: Reversal or Amplification

Negative monetary policy rates have been introduced in various advanced economies since the mid 2010s. Previous studies have shown that banks are hesitant to set negative deposit rates, implying losses in deposit taking that erode equity and eventually have a negative impact on the lending of capital constrained banks. I show that when banks are not constrained by their equity, equilibrium loan rates are lower under negative interest rates in the presence of a deposit ZLB (D-ZLB) than in its absence. Thus, policy rate cuts in negative territory might stimulate the economy even more than in positive territory, provided that sufficiently many banks are not capital constrained. In a calibrated dynamic model, the effect is large and dominates the effect due to equity erosion, with the D-ZLB increasing aggregate loan supply by on average 4% when policy rates are negative.

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