The signalling channel of negative interest rates
The signalling channel of negative interest rates
Negative policy rates can convince markets that deposit rates will remain lower-for-longer, even when current deposit rates are constrained by zero. This is the signalling channel of negative interest rates. We analyse the optimality and effectiveness of negative rates in the context of this novel transmission channel. In a stylized model, we prove two necessary conditions for optimality: time-consistency and a preference for policy smoothing. In an estimated model, we show the signalling channel dominates banks’ costly interest margin channel. However, the effectiveness of negative rates depends sensitively on the degree of policy inertia, level of reserves, and ZLB duration.
de Groot, Oliver
0be49c71-aa34-43d6-80b7-89426334ecfc
Haas, Alexander
dbf35119-2723-4cdc-80c5-6ff75d0312de
23 August 2023
de Groot, Oliver
0be49c71-aa34-43d6-80b7-89426334ecfc
Haas, Alexander
dbf35119-2723-4cdc-80c5-6ff75d0312de
de Groot, Oliver and Haas, Alexander
(2023)
The signalling channel of negative interest rates.
Journal of Monetary Economics, 138.
(doi:10.1016/j.jmoneco.2023.05.011).
Abstract
Negative policy rates can convince markets that deposit rates will remain lower-for-longer, even when current deposit rates are constrained by zero. This is the signalling channel of negative interest rates. We analyse the optimality and effectiveness of negative rates in the context of this novel transmission channel. In a stylized model, we prove two necessary conditions for optimality: time-consistency and a preference for policy smoothing. In an estimated model, we show the signalling channel dominates banks’ costly interest margin channel. However, the effectiveness of negative rates depends sensitively on the degree of policy inertia, level of reserves, and ZLB duration.
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Accepted/In Press date: 5 May 2023
e-pub ahead of print date: 7 May 2023
Published date: 23 August 2023
Identifiers
Local EPrints ID: 505077
URI: http://eprints.soton.ac.uk/id/eprint/505077
ISSN: 0304-3932
PURE UUID: e94d1c94-f81b-40a7-9776-aa45f9134d83
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Date deposited: 25 Sep 2025 17:06
Last modified: 26 Sep 2025 02:19
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Author:
Oliver de Groot
Author:
Alexander Haas
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