Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/249164 
Year of Publication: 
2022
Series/Report no.: 
DIW Discussion Papers No. 1990
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
Negative interest rates remain a controversial policy for central banks. We study a novel signalling channel and ask under what conditions negative rates should exist in an optimal policymaker's toolkit. We prove two necessary conditions for the optimality of negative rates: a time-consistent policy setting and a preference for policy smoothing. These conditions allow negative rates to signal policy easing, even with deposit rates constrained at zero. In an estimated model, the signalling channel dominates the costly interest margin channel. However, the effectiveness of negative rates depends sensitively on the degree of policy inertia, level of reserves, and ZLB duration.
Subjects: 
Monetary policy
Taylor rule
Forward guidance
Liquidity trap
JEL: 
E44
E52
E61
Document Type: 
Working Paper

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