[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, the central banks of 5 advanced regions started paying negative nominal interest rates on reserves to try to stimulate the economy, but the effectiveness of this measure remains unclear. In these regions interest rates on loans have fallen, but interest rates on retail deposits have remained stuck at zero. The fall in lending rates suggests that negative rates can stimulate the economy. On the other hand, the anchoring of deposit rates at zero indicates that this stimulus might be partial, and that it might come at the expense of eroding the profitability of commercial banks, since deposit spreads are eliminated or turn negative. This paper studies the effects of negative nominal interest rates in a general equilibrium New-Keynesian model where financial intermediation and bank profitability play an important role. In this context, if the central bank wants to set negative rates to fight a recession, it has to 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 main mechanisms in the model and to estimate some of its parameters. For reasonable calibrations I find that monetary policy in negative territory is between 30 and 90 percent as effective (in welfare terms) as in positive territory, depending on the importance of bank equity for lending.

 Nick Sander, Macroeconomics Seminar Coordinator, ncksander@berkeley.edu