Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/228873 
Year of Publication: 
2020
Series/Report no.: 
Working Paper No. 372
Publisher: 
University of Zurich, Department of Economics, Zurich
Abstract: 
Major central banks remunerate reserves at negative interest rates and it is increasingly likely that they will keep rates negative for many more years. To study the long run implications of negative rates, we construct a dynamic general equilibrium model with commercial banks funding investment projects and a central bank issuing reserves. Negative rates distort investment decisions resulting in lower output and welfare. These findings sharply contrast the short-run expansionary effects ascribed to negative rate policies by most of the existing literature. Negative rates also reduce commercial bank profitability. Exempting a fraction of reserves from negative rates can resolve profitability concerns without affecting the central bank's ability to control the money market rate. However, exemption thresholds do no mitigate the investment distortions created by negative rates.
Subjects: 
Negative interest rate
money market
monetary policy
interest rates
JEL: 
E40
E42
E43
E50
E58
Document Type: 
Working Paper

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