木曜日, 11月 16, 2017

The Reversal Interest Rate: The Effective Lower Bound of Monetary Policy




The Reversal Interest Rate: The Effective Lower Bound of Monetary Policy

The Reversal Interest Rate: The Effective Lower Bound of Monetary Policy | Markus K. Brunnermeier

https://scholar.princeton.edu/markus/publications/reversal-interest-rate-effective-lower-bound-monetary-policy

The Reversal Interest Rate: The Effective Lower Bound of Monetary Policy


The \Reversal Interest Rate": An Eective Lower Bound on Monetary Policy Markus K. Brunnermeier and Yann Kobyy 
This version: July 10, 2017 
Abstract 
The “reversal interest rate" is the rate at which accommodative monetary policy “reverses" its intended eect and becomes contractionary for lending. It occurs when recapitalization gains from the duration mismatch are oset by decreases in net interest margins, lowering banks' net worth and tightening its capital constraint. The determinants of the reversal interest rates are (i) banks asset holdings with xed (non-oating) interest payments, (ii) the degree of interest rate pass-through to deposit rate, (iii) the capital constraints that they face. Low interest rates beyond the time when xed interest rate mature do not lead to recapitalization gains while still lowering banks' margins, suggesting a shorter forward guidance policy: the reversal interest rates “creep up". Moreover, interest rate cuts can have heterogeneous eects across regions where monetary policy operates, being possibly expansionary in one region and contractionary in another. Furthermore, quantitative easing increases the reversal interest rate. QE should only be employed after interest rate cut is exhausted.
 6 Conclusion 
The “reversal interest rate" is the rate at which accommodative monetary policy \reverses" its intended eect and becomes contractionary for lending. We have shown that it occurs when recapitalization gains from reevaluation of banks' assets are oset by the future decreases in net interest margins, which lowers banks' net worth and and eventually tightens its capital constraint. Our comparative statics suggest that the reversal rate is higher when (i) banks have fewer asset holdings with xed (non-oating) interest payments, (ii) when the degree of interest rate pass-through to deposit rates is high, (iii) the capital constraints that they face are tougher. Moreover, cuts in future interest rates beyond the time when xed interest rate mature do not lead to recapitalization gains but still lowering banks' margins, suggesting a shorter forward guidance policy: the reversal interest rates “creep up". Furthermore, interest rate cuts can have heterogeneous eects across regions where monetary policy operates, being possibly expansionary in one region and contractionary in another. Furthermore, quantitative easing increases the reversal interest rate. QE should only employed after interest rate cut is exhausted. 
 Does the reversal rate survive in more general settings? The mechanism presented in this paper likely survives in general equilibrium, but it may be only a dampening mechanism, rather than causing an overall reversal rate. Indeed, the rate that depositors face still decreases in our setting, generating the substitution eect that is at the heart of the eects of monetary policy in New Keynesian models. The question then becomes: does that lead banks to capitalize higher prots, and hence possibly increase their lending, undoing the reversal rate? We plan to answer this question in the next iteration of this project, but we foresee the answer to be “it depends". Indeed, it will be important that this increasing demand generate prots that can be captured by the banks, and not other agents in the economy. Moreover, one might suspect that coordination failures could occur, generating multiplicity of equilibria, with one such equilibrium featuring no lending extension and hence mitigated, or even contractionary eects of monetary policy.


Citation:

Brunnermeier, Markus K., and Yann Koby. “The Reversal Interest Rate: The Effective Lower Bound of Monetary Policy”. (In Preparation). Print.


Reversal Interest Rate Slides.pdf

https://scholar.princeton.edu/sites/default/files/markus/files/16f_reversalrate_phillyfed.pdf

Model:



Abstract:

 

The "reversal interest rate'' is the rate at which accommodative monetary policy ``reverses'' its intended effect and becomes contractionary for lending. It occurs when recapitalization gains from the duration mismatch are offset by decreases in net interest margins, lowering banks' net worth and tightening its capital constraint. The determinants of the reversal interest rates are (i) banks asset holdings with fixed (non-floating) interest payments, (ii) the degree of interest rate pass-through to deposit rate, (iii) the capital constraints that they face. Low interest rates beyond the time when fixed interest rate mature do not lead to recapitalization gains while still lowering banks' margins, suggesting a shorter forward guidance policy: the reversal interest rates "creep up". Moreover, interest rate cuts can have heterogeneous effects across regions where monetary policy operates, being possibly expansionary in one region and contractionary in another. Furthermore, quantitative easing increases the reversal interest rate. QE should only be employed after interest rate cut is exhausted.

 


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