Do Negative Interest Rate Policies Actually Work? (And at What Cost?)

Abstract

The economic shock from the COVID-19 pandemic prompted policymakers to consider adopting negative interest rates on bank reserves to support the recovery. Since 2008, the European Central Bank (ECB), and the central banks of Switzerland, Sweden, and Japan have implemented negative rates to boost growth and avoid deflation. The evidence that negative interest rates boost growth thus far are small. Risks to bank margins and profitability exist if institutions do not pass costs onto retail depositors. U.S. financial market structure, especially the reliance of wholesale funding markets on money market mutual funds, would complicate negative rate policy implementation. Costs are likely to outweigh benefits in the United States.

Authors

David Krisch
Jian Zhang