The Reversal Interest Rate

Markus Brunnermeier and Yann Koby
Additional contact information
Yann Koby: Department of Economics, Princeton University (E-mail: ykoby@princeton.edu)

No 19-E-06, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contractionary for lending. Its determinants are 1) banks' fixed-income holdings, 2) the strictness of capital constraints, 3) the degree of pass-through to deposit rates, and 4) the initial capitalization of banks. Quantitative easing increases the reversal interest rate and should only be employed after interest rate cuts are exhausted. Over time the reversal interest rate creeps up since asset revaluation fades out as fixed-income holdings mature while net interest income stays low. We calibrate a New Keynesian model that embeds our banking frictions.

Keywords: Monetary Policy; Lower Bound; Negative Rates; Banking (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 G21 (search for similar items in EconPapers)
Date: 2019-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (54)

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Related works:
Journal Article: The Reversal Interest Rate (2023)
Working Paper: The Reversal Interest Rate (2022)
Working Paper: The Reversal Interest Rate (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:19-e-06

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