econ 4325 monetary policy lecture 12: negative interest rates · putting it all together negative...
TRANSCRIPT
ECON 4325Monetary policy
Lecture 12: Negative interest rates
Ragnar E. Juelsrud
April 26th, 2018
Zero Lower Bound (may be) here to stay
Zero Lower Bound ⇔ interest rates at zero
Kiley & Roberts (2017) - Interest rates at zero approx. 30 percent oftime going forward
Central bankers need other tools to fight next recession
Forward guidanceQuantitative + credit easingNegative nominal interest rates
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Negative interest rates are prevalent
-2
0
2
4
6Po
licy
rate
1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 1/1/2018
SwedenSwitzerlandJapanECBDenmark
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What is the rationale?
Negative rates ⇒ ”pretend” like ZLB does not exist
Makes sense in the standard NKM
πt = βEt [πt+1] + κyt
yt = Et [yt+1]− 1
σ
(iCBt − Et [πt+1]− rnt
)iCBt = ρ+ φππt + φy yt
iCBt ↓ ⇒ yt ↑, irrespective of whether iCBt ≷ 0
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Negative rates are controversial
... Cutting the repo rate below zero ... is expected to have similar effectsto repo-rate cuts when the repo rate is positive, as all channels in thetransmission mechanism can be expected to be active. Riksbanken, 2015
The MPC is very clear that ”lower bound” is a positive number ... I amnot a fan of negative rates. We see the negative consequences through thefinancial system in other jurisdictions ... M. Carney (BoE), August 2016
... the room to cut rates that are below zero is limited. Norges Bank,MPR 1/16
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What is special about negative interest rates?
In theory: Households face iCBt
In reality: iCBt affects other interest rates in the economy that arerelevant to households and firms (deposit and lending rates)
πt = βEt [πt+1] + κyt
yt = Et [yt+1]− 1
σ(it − Et [πt+1]− rnt )
iCBt = ρ+ φππt + φy yt
it = f(iCBt
)f(iCBt
)can be microfounded by adding a banking sector, see for
instance Curdia & Woodford (2010)
f(iCBt
)is crucial for whether negative rates work or not
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Different views on pass-through
it
iCBt
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Worries about limited pass-through
Worry that pass-through of negative policy rates to deposit rates willbe weaker
Standard ZLB-logicMoney act as a store of value ⇒ Households guarantueed a return ofzeroBanks are reluctant to impose negative interest rates on depositors
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How big is this of a concern?
0 20 40 60 80 100
Fraction of respondents that would withdraw money from savings account (%)
AS
LU
NL
CZ
PO
DE
TU
ES
BE
RO
US
AU
FR
UK
IT
Figure: Survey results. Source: Eggertsson et.al (2017)
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Model with ZLB on deposit rates
πt = βEt [πt+1] + κyt
yt = Et [yt+1]− 1
σ
(max{0, iCBt } − Et [πt+1]− rnt
)iCBt = ρ+ φππt + φy yt
If iCBt = 0, further interest rate cuts have no effect
This is equivalent to the ”standard” ZLB!
If the deposit rate represent the marginal cost of funds for banks,losing influence over the deposit rate reduces influence of the lendingrate
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What we need to know
A lot of research in this area these days
Current research focuses on the pass-through of negative policy ratesto banks lending and deposit activities
Some preliminary evidence
Eggertsson et.al (2017) provides overview of experiences with negativerates and implement negative interest rate into the NKMHeider et.al (2018) focus on Euro AreaBasten & Mariathasan (2018) focus on Switzerland
Remainder of this lecture: summarize what we know so far about thepass-through of negative rates
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Fact 1: Deposit rates are bounded
02
46
Perc
ent
2008 2010 2012 2014 2016 2018
Corporations HouseholdsPolicy rate
Sweden
Figure: Deposit rates, Sweden. Source: Eggertsson et.al (2017)
Similar picture for Denmark, Japan and Switzerland
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But some countries have not reached the bound
01
23
45
Perc
ent
2008 2010 2012 2014 2016 2018
Corporations HouseholdsPolicy rate
Euro Area
Figure: Deposit rates, Euro Area. Source: Eggertsson et.al (2017)
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Fact 2: Lending rates appear less responsive as well
02
46
8Pe
rcen
t
2008 2010 2012 2014 2016 2018
Corporations HouseholdsPolicy rate
Sweden
Figure: Lending rates, Sweden. Source: Eggertsson et.al (2017)
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Fact 2: But less so when deposit rates continue falling
02
46
Perc
ent
2008 2010 2012 2014 2016 2018
Corporations HouseholdsPolicy rate
Euro Area
Figure: Lending rates, Euro area. Source: Eggertsson et.al (2017)
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Fact 2: Lending rates appear less responsive as well cont.
010
2030
40R
elat
ive
chan
ge in
dep
osit
rate
22.
53
3.5
4Le
ndin
g R
ate
Repo: 0.75 0.25 0 -0.1 -0.25 -0.35 -0.50
Bank rates Pass-Through Deposit Rate
Swedish Bank Lending Rates
Figure: Bank-level lending rates, Sweden. Source: Eggertsson et.al (2017)
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Fact 2: Lending rates appear less responsive as well cont.
010
2030
40R
elat
ive
chan
ge in
dep
osit
rate
22.
53
3.5
4Le
ndin
g R
ate
Repo: 0.75 0.25 0 -0.1 -0.25 -0.35 -0.50
Bank rates Pass-Through Deposit Rate
Swedish Bank Lending Rates
Figure: Bank-level lending rates, Sweden. Source: Eggertsson et.al (2017)
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Fact 2: Lending rates appear less responsive as well cont.
010
2030
40R
elat
ive
chan
ge in
dep
osit
rate
22.
53
3.5
4Le
ndin
g R
ate
Repo: 0.75 0.25 0 -0.1 -0.25 -0.35 -0.50
Bank rates Pass-Through Deposit Rate
Swedish Bank Lending Rates
Figure: Bank-level lending rates, Sweden. Source: Eggertsson et.al (2017)
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Fact 2: Lending rates appear less responsive as well cont.
010
2030
40R
elat
ive
chan
ge in
dep
osit
rate
22.
53
3.5
4Le
ndin
g R
ate
Repo: 0.75 0.25 0 -0.1 -0.25 -0.35 -0.50
Bank rates Pass-Through Deposit Rate
Swedish Bank Lending Rates
Figure: Bank-level lending rates, Sweden. Source: Eggertsson et.al (2017)
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Drop in median correlation and increase in dispersion
-.5
0
.5
1C
orre
latio
n w
ith re
po ra
te
Positive ratesNegative ratesNegative rates (bound)
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Fact 3: Weaker correlation for banks with high depositshares
-1.78 (0.45) ***
-1
-.5
0
.5
1C
orre
latio
n w
ith re
po ra
te
.2 .4 .6 .8 1
Deposit share
Figure: Repo and bank rate correlation, Sweden. Source: Eggertsson et.al (2017)
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Lower lending growth
∆ log (Lending)i ,t = α + β(I postt × Deposit sharei
)+ δi + δt + εit
Figure: Lending growth, after implementation of negative rates in Sweden.Source: Eggertsson et.al (2017)
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Taking stock
The experiences with negative interest rates so far are mixed
When bank interest rates already are low ...
⇒ decoupling from policy rate⇒ monetary policy less effective
In fact, negative interest rates can be harmful
”Negative rates starting to weigh on banks profits” (Financial Times18th of August, 2016)
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A reminder on how banks work
Banks make money by having higher interest rates on their assetsrelative to their liabilities
Negative rates on reserves ⇒ lower profits
Because CB control reserve supply, banks in aggregate have netreserves
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Can banks avoid negative rates?
What can banks do to avoid negative rates?
Answer: Withdraw all reserves into cash.
HUGE costs
FT: European reserves in cash (largest bill possible) would fill 195hotel rooms ...
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Negative interest rates harm bank equity
With asymmetric information, banks face a balance-sheet constraint
P ≥ ηDη is constraintP is market value of equityD is total debt the banks take on (i.e. reserves + bonds + loans)
P = Expected future profits of holding bank stock
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Negative interest rates harm bank equity, cont’d
Assume only 1 period
Profits = i lL + i rR − idD
i l interest rate on loans Li r interest rate on reserves Rid interest rate on deposits D
With negative interest rates, i r < 0 and id ≈ 0
Profit ≈ i lL + i rR
i r ↓ ⇒ Profit ↓ ⇒ market value of equity ↓ ⇒ balance sheetconstraint tightened
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Empirical evidence
Ampudia & Van den Heuvel (2017): Looks at what happens to bankequity values with positive and negative rates
FindingsPolicy rate reduction in positive territory ⇒ bank equity increases invalue (”bank capital channel”)Policy rate reduction in negative territory ⇒ bank equity decreases invalue ⇒ Collateral constraint tightens
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In theory
Figure: Impulse responses from discount rate shock. Source: Eggertsson et.al(2018)
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Putting it all together
Negative nominal interest rates are a new, radical policy experiment
Just starting to gain evidence on how effective it is
So far, it seems like1 Deposit rates remain stuck at zero (no pass-through to deposit rates)2 Once deposit rate become stuck, limited pass-through to lending rates3 Evidence that bank balance sheets are weakened
Bank lending channel substantially weakened (but other channels maystill be active)
On the upside: Less cash in society ⇒ ZLB-problems less severe ⇒negative rates potentially more expansionary
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