The Reversal Interest Rate

Joseph Abadi, Markus Brunnermeier and Yann Koby ()

No 22-28, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contractionary for lending. We theoretically demonstrate its existence in a macroeconomic model featuring imperfectly competitive banks that face financial frictions. When interest rates are cut too low, further monetary stimulus cuts into banks’ profit margins, depressing their net worth and curtailing their credit supply. Similarly, when interest rates are low for too long, the persistent drag on bank profitability eventually outweighs banks’ initial capital gains, also stifling credit supply. We quantify the importance of this mechanism within a calibrated New Keynesian model.

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)
Pages: 42
Date: 2022-09-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: The Reversal Interest Rate (2023)
Working Paper: The Reversal Interest Rate (2019)
Working Paper: The Reversal Interest Rate (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:94694

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DOI: 10.21799/frbp.wp.2022.28

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