Implications of negative interest rate policies: An early assessment

• DOI: http://doi.org/10.1111/1468-0106.12249
• Date: 01 February 2018
• Published date: 01 February 2018
• Author: Temel Taskin,Carlos Arteta,M. Ayhan Kose,Marc Stocker

SPECIAL ISSUE ARTICLE

Implications of negative interest rate policies:

An early assessment

Carlos Arteta

1

| M. Ayhan Kose

1,2

| Marc Stocker

1

| Temel Taskin

1

1

Development Prospects Group, World Bank,

Washington, DC

2

Brookings Institution, CEPR; CAMA,

Washington, DC

Correspondence

M. Ayhan Kose, Development Prospects Group,

The World Bank Group, 1818 H Street NW,

Washington, DC 20433.

Email: akose@worldbank.org

Abstract

Over the past few years, several central banks have imple-

mented negative interest rate policies (NIRP) to provide

additional monetary policy stimulus. This paper presents an

early assessment of the domestic and global implications of

NIRP by analysing the behaviour of a set of key financial

variables. We report three main results. First, since the intro-

duction of NIRP, many of the key financial variables have

evolved broadly, as implied by the standard transmission

channels. For the euro area, the responses of these financial

variables following NIRP announcements are directionally

consistent with those of conventional interest rate cuts. Sec-

ond, NIRP could pose risks to financial stability but there is

no conclusive evidence as yet of a significant impact on

bank profitability or of a broad-based increase in leverage.

Third, the responses of assets of emerging market and

developing economies to NIRP announcements are on aver-

age broadly consistent with those to other types of expan-

sionary monetary policy measures.

1|INTRODUCTION

1

A number of central banks, including the Danmarks Nationalbank (DNB), the European Central

Bank (ECB), the Swiss National Bank (SNB), Swedish Riksbank, the Bank of Japan (BoJ) and the

Central Bank of Hungary (MNB), have employed negative interest rate policies (NIRP) to provide

additional monetary policy stimulus over the past few years (Figure 1). These central banks are now

charging (instead of paying) commercial banks for their excess reserves (Table 1). Countries with

NIRP account for approximately one quarter of world GDP as of August 2016. In conjunction with

the implementation of NIRP, yields on a sizable class of sovereign bonds in some of these countries

have also declined significantly.

1

This paper draws from Arteta, Kose, Stocker, and Taskin (2016) who provide a comprehensive analysis of the issues discussed.

Received: 1 December 2016 Accepted: 1 April 2017

DOI: 10.1111/1468-0106.12249

8© 2018 John Wiley & Sons Australia, Ltd wileyonlinelibrary.com/journal/paer Pac Econ Rev. 2018;23:8–26.

The use of NIRP aimed to show central banks’resolve to meet their policy objectives, as the

perceived zero lower bound constrained their ability to commit to additional policy easing. In partic-

ular, the main motivation for the implementation of NIRP by the ECB, the BoJ, Riksbank and the

MNB was the need to stabilize inflation expectations and support growth. In the case of the SNB

and the DNB, an immediate motivation was the need to respond to currency appreciation and capital

inflow pressures. For central banks implementing quantitative easing (QE) policies, two additional

considerations were the narrowing pool of assets eligible for their purchase programmes and the

possibility of diminishing returns from QE.

Historically, negative interest rates (policy-determined or otherwise) have been an extremely

rare phenomenon. In the United States, some Treas ury bill yields briefly fell below zero during

the Great Depression and during the height of the 2008–2009 global financial crisis. The SNB

sporadically introduced negative interest rates on foreign deposits during the 1970s to prevent

capital inflows and excessive appreciation of the Swiss franc (Meggyesi, 2010). Yields on

some Japanese government bonds were negative for a brief period during the downturn of the

late 1990s. Swedish Riksbank temporarily lowered its deposit rate below zero in 2009. How-

ever, the widespread emergence of negative interest rates outside of a financial crisis is

unprecedented.

A cut in policy rates slightly below zero should, in principle, have similar effects as a cut in rates

to low but positive territory. However, policy rates substantially below zero for a protracted period

of time could lead to greater risks of financial market disruptions. NIRP, like other unconventional

monetary policy measures, could also have spillover effects on emerging market and developing

economies (EMDE), as search for yields in reaction to negative rates in advanced economies may

affect capital flows to EMDE.

The unprecedented use of NIRP in multiple countries has not just extended the boundaries of

unconventional monetary policies but also fuelled an already polarized debate on the implications of

these policies. Some argue that NIRP have so far served the intended purpose, complementing the

broader set of expansionary measures employed by central banks (Bernanke, 2016; Draghi, 2016).

Others, however, emphasize financial stability risks associated with NIRP and claim that they may

have weakened banks’willingness to lend, contributed to financial market distortions, further

inflated asset prices, and delayed the implementation of necessary macroeconomic and structural

policies (Carney, 2016; White, 2014).

Despite these highly polarized discussions, research on the implications of NIRP has been lim-

ited. The present paper examines the short-term domestic and global implications of NIRP by

employing a set of event studies. The event study methodology has been commonly used in the

–1

0

1

2

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

Euro area Sweden Japan

Switzerland Denmark Hungary

tnecrePtnecreP

FIGURE 1 Policy interest rates. Sources: European

Central Bank, Bank of Japan, Swedish Riksbank, Swiss

National Bank, Danmarks Nationalbank, Central Bank of

Hungary, Haver Analytics, Bloomberg and World Bank.

Notes: Policy rates are the following: euro area, overnight

deposit facility; Sweden, repo rate; Japan, current account

deposit; Switzerland, middle point of target range for 3-

month LIBOR; Denmark, 1-week certificate of deposit;

Hungary, overnight deposit. Last observation is

February 2017

ARTETA ET AL.9