The Reversal Interest Rate: The Effective Lower Bound of Monetary Policy

Citation:

Brunnermeier, Markus K., and Yann Koby. “The Reversal Interest Rate: The Effective Lower Bound of Monetary Policy”. (In Preparation). Print.

Abstract:

The "reversal interest rate'' is the rate at which accommodative monetary policy "reverses" its effect and becomes contractionary. The reversal interest rate depends on various factors: (i) banks' asset holdings with fixed (non-floating) interest payments, (ii) degree of interest rate pass-through to loan rate and deposit rate, (iii) amount of bank's whole sale funding. Quantitative easing (QE) increases the reversal rate. QE should only employed after interest rate cut is exhausted. Moreover, low interest rates beyond the time when fixed interest rate mature undo its effectiveness, suggesting a different forward guidance policy.

Last updated on 08/28/2016