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Shocking Interest Rate Floors

Author

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  • Fabio Canetg
  • Daniel Kaufmann

Abstract

We identify the dynamic causal effects of interest rate floor shocks, exploiting regular auctions of Swiss central bank debt securities (SNB Bills). A theoretical model shows that variation in the volume of, and yield on, central bank debt changes the interest rate floor. In addition, the model establishes the equivalence between central bank debt and interest-bearing reserves when reserves are ample. Based on these insights, the empirical analysis identifies an interest rate floor shock in a dynamic event study of SNB Bill auctions. A restrictive interest rate floor shock causes an increase in the money market rate, a persistent appreciation of the Swiss franc, a decline in long-term interest rates, and a decline in stock prices. We then perform policy experiments under various identifying assumptions in which the central bank raises the interest rate floor from 0% to 0.25%. Such a policy change causes a 3-6% appreciation of the Swiss franc and a 5-20% decline in stock prices

Suggested Citation

  • Fabio Canetg & Daniel Kaufmann, 2019. "Shocking Interest Rate Floors," Diskussionsschriften dp1901, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp1901
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    References listed on IDEAS

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    2. Berentsen, Aleksander & Kraenzlin, Sébastien & Müller, Benjamin, 2018. "Exit strategies for monetary policy," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 20-40.
    3. Kraenzlin, Sébastien & Nellen, Thomas, 2015. "Access policy and money market segmentation," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 1-12.
    4. repec:eee:inecon:v:118:y:2019:i:c:p:293-315 is not listed on IDEAS
    5. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    6. Cieslak, Anna & Schrimpf, Andreas, 2019. "Non-monetary news in central bank communication," Journal of International Economics, Elsevier, vol. 118(C), pages 293-315.
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    8. Bech, Morten & Monnet, Cyril, 2016. "A search-based model of the interbank money market and monetary policy implementation," Journal of Economic Theory, Elsevier, vol. 164(C), pages 32-67.
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    More about this item

    Keywords

    Exit strategies; interest rate floors; central bank debt securities; interest on reserves; monetary policy shocks; identification through heteroscedasticity;

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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