Banks, Money, and the Zero Lower Bound on Deposit Rates

Michael Kumhof and Xuan Wang ()

No 20-050/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We develop a New Keynesian model where all payments between agents require bank deposits through deposits-in-advance constraints, bank deposits are created through disbursement of bank loans, and banks face a convex lending cost. At the zero lower bound on deposit rates (ZLBD), changes in policy rates affect activity through both real interest rates and banks’ net interest margins (NIM). At estimated credit supply elasticities, the Phillips curve is very flat at the ZLBD, because inflationary pressures increase NIM. This strongly increases credit and thereby output, but it dampens inflation by relaxing price setters’ credit rationing constraint. At the ZLBD, monetary policy has far larger effects on output relative to inflation, and Taylor rules stabilize output less effectively than rules that also respond to credit. For post-COVID-19 policy, this suggests urgency in returning inflation to targets, avoidance of negative policy rates, and a strong influence of credit conditions on rate setting.

Keywords: Banks; money creation; inside money; money demand; deposits-in-advance; Phillips curve; zero lower bound; monetary policy rules; Taylor rules; post-COVID-19 reforms (search for similar items in EconPapers)
JEL-codes: E41 E44 E51 G21 (search for similar items in EconPapers)
Date: 2020-08-20
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac, nep-mon and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://papers.tinbergen.nl/20050.pdf (application/pdf)

Related works:
Journal Article: Banks, money, and the zero lower bound on deposit rates (2021)
Working Paper: Banks, money and the zero lower bound on deposit rates (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20200050

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().