Can a negative interest rate regime, where depositors are charged instead of paid interest, influence monetary policy transmission and lending practices? Does it optimize capital allocation for productive investments and business activities? Please provide references to relevant research studies, if any.
Negative interest rate is a situation where monetary authority set policy rate below zero, that is bank customers pay to keep their money instead of earning interest for their deposits.
this situation may influence the monetary policy transmission, but it entirely depends on context and implementation.
A negative interest rate regime can influence monetary policy transmission and lending practices. Negative interest rates can incentivize banks to lend more by reducing the cost of borrowing. However, negative interest rates can also have counter-productive effects by impinging on banks’ intermediation capacity and profitability.
Yes, a negative interest rate regime can influence monetary policy transmission and lending practices. Negative rates soften the expectation of markets that current and future short-term rates cannot be negative. By lowering the perceived lower bound of central bank rates, negative rates allow the monetary accommodation to propagate through the entire yield curve. Moreover, commercial banks are incentivized to expand lending so as to avoid the negative rate applied to their excess holdings of reserves with the central bank (excess liquidity) in a situation in which the cost of liabilities is partially constrained.
A negative interest rate as a monetary policy tool is possible with CBDC
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