Seminar 237, Going Negative at the Zero Lower Bound: The Effects of Negative Rates on Bank Profitability.

Seminar | August 28 | 2-3:30 p.m. | 597 Evans Hall

 Mauricio Ulate, University of California - Berkeley

 Department of Economics

In the aftermath of the Great Recession several central banks started paying negative nominal interest rates on reserves in an expansionary attempt, but the effectiveness of this measure remains unclear. Negative rates can stimulate the economy by lowering the interest rates that commercial banks charge on loans, but they can also hurt bank profitability by squeezing deposit spreads. This paper studies the effects of negative rates in a new DSGE model where banks intermediate the transmission of monetary policy. In this context, if the central bank intends to fight a recession by setting negative rates it must take into account that doing so can hurt bank profitability, so the benefits of an interest rate cut might be smaller than usual. I use bank-level data to provide evidence for the mechanisms in the model and to estimate its main parameters. I find that monetary policy in negative territory is between 60% and 90% as effective (in welfare terms) as in positive territory, depending on the importance of bank equity for lending.

 Nick Sander, Macroeconomics Seminar Coordinator,