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Illing, G. The Limits of a Negative Interest Rate Policy (NIRP). Credit and Capital Markets – Kredit und Kapital, 51(4), 561-585. https://doi.org/10.3790/ccm.51.4.561
Illing, Gerhard "The Limits of a Negative Interest Rate Policy (NIRP)" Credit and Capital Markets – Kredit und Kapital 51.4, 2018, 561-585. https://doi.org/10.3790/ccm.51.4.561
Illing, Gerhard (2018): The Limits of a Negative Interest Rate Policy (NIRP), in: Credit and Capital Markets – Kredit und Kapital, vol. 51, iss. 4, 561-585, [online] https://doi.org/10.3790/ccm.51.4.561
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The Limits of a Negative Interest Rate Policy (NIRP)

Illing, Gerhard

Credit and Capital Markets – Kredit und Kapital, Vol. 51 (2018), Iss. 4 : pp. 561–585

2 Citations (CrossRef)

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Article Details

Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.51.4.561
Language
English
Pages
25
Keywords

Author Details

Prof. Dr. Gerhard Illing, University of Munich, Department of Economics, Ludwigstrasse 28, D-80539 Munich, E-Mail: Illing@lmu.de

Cited By

  1. A prolonged period of low interest rates in Europe: Unintended consequences

    Malovaná, Simona | Bajzík, Josef | Ehrenbergerová, Dominika | Janků, Jan

    Journal of Economic Surveys, Vol. 37 (2023), Iss. 2 P.526

    https://doi.org/10.1111/joes.12499 [Citations: 5]

  2. Negative Interest Rates and Its Impact on GDP, FDI and Banks’ Financial Performance: The Cases of Switzerland and Sweden

    Wawrosz, Petr | Traksel, Semen

    International Journal of Financial Studies, Vol. 11 (2023), Iss. 2 P.69

    https://doi.org/10.3390/ijfs11020069 [Citations: 0]

References

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  2. Agarwal R./Kimball, M. (2015), “Breaking Through the Zero Lower Bound,” IMF Working Paper, No. 15/224.  Google Scholar
  3. Altavilla, C./Canova, F./Ciccarelli, M. (2016), Mending the broken link: Heterogeneous bank lending and monetary policy pass-through. ECB Working Paper Series 1978.  Google Scholar
  4. Andrade, P./Breckenfelder, J./De Fiore, F./Karadi, P./Tristani, O. (2018), The Reanchoring Channel of QE* The ECB’s Asset Purchase Programme and Long-Term Inflation Expectations, ECB Frankfurt, mimeo, to appear in the International Journal of Central Banking.  Google Scholar
  5. Basten, C./Mariathasan, M. (2018), How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold, CESifo Working Paper 6901, Munich.  Google Scholar
  6. Blanchard, O./Dell’Ariccia, G./Mauro, P. (2010): “Rethinking Macroeconomic Policy,” IMF Staff Position Note.  Google Scholar
  7. Borio, C./Zabai, A. (2016) “Unconventional monetary policies: a re-appraisal”, BIS Working Paper No 570, 2016.  Google Scholar
  8. Cao, J./Illing, G. (2015): “‘Interest rate trap’, or: Why does the central bank keep the policy rate too low for too long?” Scandinavian Journal of Economics, 117(4), 1256–1280.  Google Scholar
  9. Coibion, O./Wieland, J./Gorodnichenko, Y. (2012), The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?” Review of Economic Studies, 79(4), 1371–1406.  Google Scholar
  10. Del Negro, M./Giannone, D./Giannoniand, M. P./Tambalotti, A. (2017), “Safety, Liquidity and the Natural Rate of Interest,” Brookings Papers on Economic Activity, Spring, pp. 235–303.  Google Scholar
  11. Eggertsson, G./Juelsrud, R./Wold, E. G. (2017), “Are negative nominal interest rates expansionary?”, NBER Working Paper 24039.  Google Scholar
  12. Eggertsson, G./Woodford, M. (2003), “Zero Bound on Interest Rates and Optimal MonetaryPolicy”, Brookings Papers on Economic Activity 1, 139–233, Washington, D.C.  Google Scholar
  13. Friedman, M. (1969), “The Optimum Quantity of Money”. In: The Optimal Quantity of Money and other Essays, Chicago 1969, 1–50.  Google Scholar
  14. Gesell, S. (1911), Die Natürliche Wirtschaftsordnung, Rudolf Zitzman Verlag, 1949.  Google Scholar
  15. Goodfriend, M. (2000). “Overcoming the Zero Bound on Interest Rate Policy.” Journal of Money, Credit, and Banking 4, no. 32, 1007–35.  Google Scholar
  16. Heider, F./Saidi, F./Schepens, G. (2016), Life Below Zero: Bank Lending Under Negative Policy Rates, Working Paper.  Google Scholar
  17. Holston, K./Laubach, T./Williams, J. C. (2017), “Measuring the Natural Rate of Interest: International Trends and Determinants.” Journal of International Economics, 108, Supplement 1, S59–S75.  Google Scholar
  18. Hristov, N./Hülsewig, O./Wollmershäuser, T. (2014) The interest rate passthrough in the Euro area during the global financial crisis, Journal of Banking & Finance, 48 (C), 104–119.  Google Scholar
  19. Illing, G./Ono, Y./Schlegl, M. (2018), Credit Booms, Debt Overhang and Secular Stagnation, European Economic Review, 108 (2018) 78–104.  Google Scholar
  20. Illing, G./Siemsen, T. (2016): “Forward guidance in a model with price-level targeting.” CESifo Economic Studies 62(1): 47–67.  Google Scholar
  21. Kiley, M. T. (2015). “What Can the Data Tell Us About the Equilibrium Real Interest Rate?” Finance and Economics Discussion Series 2015–077, Federal Reserve Board of Governors.  Google Scholar
  22. Kiley, M, T./Roberts, J. (2017), “Monetary Policy in a Low Interest Rate World”, Brookings Papers on Economic Activity, 317–396.  Google Scholar
  23. Laubach, T./Williams, J. (2003), Measuring the Natural rate of Interest, Review of Economics and Statistics 85, 1063–1070.  Google Scholar
  24. Nakamura, E./Steinsson, J./Sun, P./Villar, D. (2016) “The Elusive Costs of Inflation: Price Dispersion during the U.S. Great Inflation.” NBER Working Paper No. 22505.  Google Scholar
  25. Rognlie, M. (2016), What Lower Bound? Monetary Policy with Negative Interest Rates, mimeo, MIT.  Google Scholar
  26. Rogoff, K. (2014), Costs and Benefits of Phasing out Paper Currency, NBER Working Paper 20126.  Google Scholar
  27. Schenkelberg, H./Watzka, S. (2013), Real effects of quantitative easing at the zero lower bound: Structural VAR-based evidence from Japan, Journal of International Money and Finance 33. 327–357.  Google Scholar
  28. Schmitt-Grohe, S./Uribe, M. (2010), “The Optimal Rate of Inflation,” Handbook of Monetary Economics, in: B. M. Friedman & M. Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 13, 653–722.  Google Scholar
  29. Summers, L. (2014), “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound”, Business Economics, Vol. 49, No. 2, National Association for Business Economics.  Google Scholar
  30. Urbschat, F. (2018), The Good, the Bad, and the Ugly: Impact of Unconventional Monetary Policy on the Profitability and Risk-Taking of 1600 German Banks, CESifo Working Paper, Munich.  Google Scholar
  31. Weizsäcker, C. C. von (2015), Kapitalismus in der Krise? – Der negative natürliche Zins und seine Folgen für die Politik. In: Perspektiven der Wirtschaftspolitik 16, 189–212.  Google Scholar
  32. Wicksell, K. (1898), Geldzins und Güterpreise, Gustav Fischer Verlag, Jena.  Google Scholar
  33. Adam, K./Tzamourani, P. (2016), Distributional consequences of asset price inflation in the Euro Area, European Economic Review, 89, 172–192.  Google Scholar
  34. Agarwal R./Kimball, M. (2015), “Breaking Through the Zero Lower Bound,” IMF Working Paper, No. 15/224.  Google Scholar
  35. Altavilla, C./Canova, F./Ciccarelli, M. (2016), Mending the broken link: Heterogeneous bank lending and monetary policy pass-through. ECB Working Paper Series 1978.  Google Scholar
  36. Andrade, P./Breckenfelder, J./De Fiore, F./Karadi, P./Tristani, O. (2018), The Reanchoring Channel of QE* The ECB’s Asset Purchase Programme and Long-Term Inflation Expectations, ECB Frankfurt, mimeo, to appear in the International Journal of Central Banking.  Google Scholar
  37. Basten, C./Mariathasan, M. (2018), How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold, CESifo Working Paper 6901, Munich.  Google Scholar
  38. Blanchard, O./Dell’Ariccia, G./Mauro, P. (2010): “Rethinking Macroeconomic Policy,” IMF Staff Position Note.  Google Scholar
  39. Borio, C./Zabai, A. (2016) “Unconventional monetary policies: a re-appraisal”, BIS Working Paper No 570, 2016.  Google Scholar
  40. Cao, J./Illing, G. (2015): “‘Interest rate trap’, or: Why does the central bank keep the policy rate too low for too long?” Scandinavian Journal of Economics, 117(4), 1256–1280.  Google Scholar
  41. Coibion, O./Wieland, J./Gorodnichenko, Y. (2012), The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the Zero Lower Bound?” Review of Economic Studies, 79(4), 1371–1406.  Google Scholar
  42. Del Negro, M./Giannone, D./Giannoniand, M. P./Tambalotti, A. (2017), “Safety, Liquidity and the Natural Rate of Interest,” Brookings Papers on Economic Activity, Spring, pp. 235–303.  Google Scholar
  43. Eggertsson, G./Juelsrud, R./Wold, E. G. (2017), “Are negative nominal interest rates expansionary?”, NBER Working Paper 24039.  Google Scholar
  44. Eggertsson, G./Woodford, M. (2003), “Zero Bound on Interest Rates and Optimal MonetaryPolicy”, Brookings Papers on Economic Activity 1, 139–233, Washington, D.C.  Google Scholar
  45. Friedman, M. (1969), “The Optimum Quantity of Money”. In: The Optimal Quantity of Money and other Essays, Chicago 1969, 1–50.  Google Scholar
  46. Gesell, S. (1911), Die Natürliche Wirtschaftsordnung, Rudolf Zitzman Verlag, 1949.  Google Scholar
  47. Goodfriend, M. (2000). “Overcoming the Zero Bound on Interest Rate Policy.” Journal of Money, Credit, and Banking 4, no. 32, 1007–35.  Google Scholar
  48. Heider, F./Saidi, F./Schepens, G. (2016), Life Below Zero: Bank Lending Under Negative Policy Rates, Working Paper.  Google Scholar
  49. Holston, K./Laubach, T./Williams, J. C. (2017), “Measuring the Natural Rate of Interest: International Trends and Determinants.” Journal of International Economics, 108, Supplement 1, S59–S75.  Google Scholar
  50. Hristov, N./Hülsewig, O./Wollmershäuser, T. (2014) The interest rate passthrough in the Euro area during the global financial crisis, Journal of Banking & Finance, 48 (C), 104–119.  Google Scholar
  51. Illing, G./Ono, Y./Schlegl, M. (2018), Credit Booms, Debt Overhang and Secular Stagnation, European Economic Review, 108 (2018) 78–104.  Google Scholar
  52. Illing, G./Siemsen, T. (2016): “Forward guidance in a model with price-level targeting.” CESifo Economic Studies 62(1): 47–67.  Google Scholar
  53. Kiley, M. T. (2015). “What Can the Data Tell Us About the Equilibrium Real Interest Rate?” Finance and Economics Discussion Series 2015–077, Federal Reserve Board of Governors.  Google Scholar
  54. Kiley, M, T./Roberts, J. (2017), “Monetary Policy in a Low Interest Rate World”, Brookings Papers on Economic Activity, 317–396.  Google Scholar
  55. Laubach, T./Williams, J. (2003), Measuring the Natural rate of Interest, Review of Economics and Statistics 85, 1063–1070.  Google Scholar
  56. Nakamura, E./Steinsson, J./Sun, P./Villar, D. (2016) “The Elusive Costs of Inflation: Price Dispersion during the U.S. Great Inflation.” NBER Working Paper No. 22505.  Google Scholar
  57. Rognlie, M. (2016), What Lower Bound? Monetary Policy with Negative Interest Rates, mimeo, MIT.  Google Scholar
  58. Rogoff, K. (2014), Costs and Benefits of Phasing out Paper Currency, NBER Working Paper 20126.  Google Scholar
  59. Schenkelberg, H./Watzka, S. (2013), Real effects of quantitative easing at the zero lower bound: Structural VAR-based evidence from Japan, Journal of International Money and Finance 33. 327–357.  Google Scholar
  60. Schmitt-Grohe, S./Uribe, M. (2010), “The Optimal Rate of Inflation,” Handbook of Monetary Economics, in: B. M. Friedman & M. Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 13, 653–722.  Google Scholar
  61. Summers, L. (2014), “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound”, Business Economics, Vol. 49, No. 2, National Association for Business Economics.  Google Scholar
  62. Urbschat, F. (2018), The Good, the Bad, and the Ugly: Impact of Unconventional Monetary Policy on the Profitability and Risk-Taking of 1600 German Banks, CESifo Working Paper, Munich.  Google Scholar
  63. Weizsäcker, C. C. von (2015), Kapitalismus in der Krise? – Der negative natürliche Zins und seine Folgen für die Politik. In: Perspektiven der Wirtschaftspolitik 16, 189–212.  Google Scholar
  64. Wicksell, K. (1898), Geldzins und Güterpreise, Gustav Fischer Verlag, Jena.  Google Scholar

Abstract

The paper analyzes the experience with unconventional measures to cope with the Zero Lower Bound. It argues that forward guidance and quantitative easing are the natural extension of optimal monetary policy within the New Keynesian Framework, facing a Lower Bound. Unconventional policy had significant effects on financial variables and contributed to stabilizing the real economy. Negative rates have been successful in pushing the effective lower bound below zero. But given the risk of damaging side effects on financial stability and on central bank independence, these policy tools are likely to be less powerful and shorter-lived compared to standard tools. In view of the long-term decline of the natural rate of interest, raising the inflation target up to 3–4 percent appears to be the most promising way to relax the constraint imposed by the lower bound, providing a resilient buffer for effective stabilization.

Table of Contents

Section Title Page Action Price
Gerhard Illing: The Limits of a Negative Interest Rate Policy (NIRP) 1

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