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Transmission of Negative Interest Rates: Reversal or Amplification?

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Abstract

Previous studies have shown that banks avoid passing negative monetary policy rates through to depositors, implying losses in deposit taking that erode equity and eventually have a negative impact on the lending of capital constrained banks. This paper shows that unconstrained banks respond differently, increasing loan supply even more with a deposit zero lower bound (D-ZLB) than without it. As a result, rate cuts below zero can be more stimulative than in positive territory, provided enough banks are unconstrained. A calibrated dynamic model finds this effect substantial, increasing aggregate loan supply by about 9% despite equity erosion pressures.

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  • Jan Lukas Schäfer, 2026. "Transmission of Negative Interest Rates: Reversal or Amplification?," Working Papers wp2026_2606, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp2026_2606
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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