Expansionary Yet Different: Credit Supply and Real Effects of Negative Interest Rate Policy
69 Pages Posted: 28 May 2020 Last revised: 22 Nov 2021
Date Written: August 09, 2021
We show that negative interest rate policy (NIRP) has expansionary effects on credit supply through a portfolio rebalancing channel. By shifting down and flattening the yield curve, NIRP differs from rate cuts just above the zero-lower-bound and has effects similar to QE. For identification, we exploit ECB's NIRP and the Italian credit register, and, for external validity, European and U.S. datasets. NIRP affects more banks with higher ex-ante liquid assets, including net interbank positions. More exposed banks reduce liquid assets, expand credit supply, especially to financially-constrained firms, and cut loan rates, inducing firms to increase investment and the wage bill.
Keywords: negative nominal interest rates; firm-level real effects; portfolio rebalancing; liquidity management; monetary policy
JEL Classification: G21; E52; E58
Suggested Citation: Suggested Citation