Transmission of Negative Interest Rates: Reversal or Amplification?  

Latest version

Abstract

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 in a stylized model 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 as long as banks’ net present value remains positive. 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 leading to on average 7 bp lower loan rates when policy rates are negative.

ECB Euro Liquidity Lines 

With Silvia Albrizio, Iván Kataryniuk and Luis Molina 

Latest version accepted at International Journal of Central Banking. 

Abstract

Central bank liquidity lines have gained importance as a cross-currency liquidity management tool with the intention to prevent threats to financial stability. We provide a complete timeline of ECB liquidity line announcements and quantify their signaling effect. The premium to borrow euros in FX markets is estimated to decrease by 51 basis points upon announcement. Moreover, we test for spillbacks and find that bank stock prices increase by around 2.1% in euro area countries highly exposed via banking linkages to currencies targeted by liquidity lines. The mechanism behind this novel result is illustrated in a stylized bank default model.

VoxEU Article. BdE Research Features.

Supplementary Material: Timeline ECB Liquidity Line Announcements.

Negative Interest Rates With Risky Banks: A Welfare Analysis in General Equilibrium

Work in progress (draft coming soon).

Abstract

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. This lack of transmission into deposit rates implies that banks face losses on deposits when policy rates fall sufficiently. To assess the effects of negative monetary policy rates in general equilibrium, I develop and calibrate a New Keynesian model featuring a deposit ZLB and endogenous  loan defaults. While on average the impact on financial stability of a lower bound on monetary policy rates is slightly negative in equilibrium, loan volumes are larger and welfare is higher when the central bank commits to monetary policy rates above the rate at which banks start to make losses on deposits.

Should Banks’ Regulatory Capital Reflect Unrealized Capital Gains And Losses? A Quantitative Assessment. 

With Vedant Agarwal.

Work in progress (draft coming soon).

Abstract

We develop a quantitative general equilibrium model of risky banks with a bond port- folio subject to interest rate risk and consider the implications of having the unrealized capital gains or losses of such a portfolio excluded from (amortized-cost accounting) or included in (fair-value accounting) the definition of regulatory capital. We show that when the unrealized gains or losses are excluded, banks are better isolated from short- term volatility in securities returns, resulting in a smoother credit supply. However, this accounting treatment increases the probability of bank failure during prolonged periods of intense monetary policy tightening. Under our calibration, fair-value accounting is superior to amortized-cost accounting in welfare terms.