Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission and Bank Profitability in the Euro Area

49 Pages Posted: 9 Dec 2016

See all articles by Andreas (Andy) Jobst

Andreas (Andy) Jobst

Central Bank of the UAE

Huidan Lin

International Monetary Fund

Date Written: August 2016

Abstract

More than two years ago the European Central Bank (ECB) adopted a negative interest rate policy (NIRP) to achieve its price stability objective. Negative interest rates have so far supported easier financial conditions and contributed to a modest expansion in credit, demonstrating that the zero lower bound is less binding than previously thought. However, interest rate cuts also weigh on bank profitability. Substantial rate cuts may at some point outweigh the benefits from higher asset values and stronger aggregate demand. Further monetary accommodation may need to rely more on credit easing and an expansion of the ECB's balance sheet rather than substantial additional reductions in the policy rate.

Keywords: Negative interest rates, Euro Area, Interest rate policy, Banks, Profits, Unconventional monetary policy instruments, Monetary transmission mechanism, European Central Bank, negative rates, NIRP, unconventional monetary policy, monetary transmission

JEL Classification: E43, E52, E58, G21

Suggested Citation

Jobst, Andreas A. and Lin, Huidan, Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission and Bank Profitability in the Euro Area (August 2016). IMF Working Paper No. 16/172, Available at SSRN: https://ssrn.com/abstract=2882609

Andreas A. Jobst (Contact Author)

Central Bank of the UAE ( email )

Abu Dhabi, Abu Dhabi
United Arab Emirates
+971-543439374 (Phone)

HOME PAGE: http://https://www.linkedin.com/in/andyjobst/

Huidan Lin

International Monetary Fund ( email )

700 19th Street
Washington D.C., DC 20431
United States

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