Negative rates and the effective lower bound: theory and evidence

McLeay, Michael, Tenreyro, Silvana ORCID: 0000-0002-9816-7452 and von dem Berge, Lukas (2025) Negative rates and the effective lower bound: theory and evidence. Journal of the European Economic Association. ISSN 1542-4774 (In Press)

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Abstract

With the monetary policy lower bound a re-emerging concern in some locations, we present new insights on the impact of negative policy rates. We develop a new theoretical model to match the empirical evidence on their effects. It features a heterogeneous, oligopolistic banking sector where loan pricing is determined in part by the availability of deposit funding and in part by wholesale funding. The use of non-deposit funding ensures that the bank lending channel of negative rates remains active. We explore the impact of the policy on different types of banks: high-deposit banks may experience a fall in interest margins and profitability, which can result in reduced lending. But this is more than compensated by greater lending from low-deposit banks. We embed this banking sector in an open-economy macroeconomic model, featuring exchange-rate and capital market transmission channels, which continue to work as normal when rates are negative. These non-bank channels, combined with general equilibrium effects and an active bank lending channel, mean that the transmission of negative rates is only somewhat weaker than conventional policy.

Item Type:	Article
Additional Information:	© The Author(s)
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory
Date Deposited:	24 Nov 2025 14:27
Last Modified:	24 Nov 2025 14:27
URI:	http://eprints.lse.ac.uk/id/eprint/130299

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