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The signalling channel of negative interest rates

Abstract:

Negative interest rates remain a controversial policy for central banks. We study a novel signalling channel and ask under what conditions negative rates should exist in an optimal policymaker’s toolkit. We prove two necessary conditions for the opti mality of negative rates: a time-consistent policy setting and a preference for policy smoothing. These conditions allow negative rates to signal policy easing, even with deposit rates constrained at zero. In an estimated model, the signal...

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Publication status:
Published

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Institution:
University of Oxford
Division:
SSD
Department:
Economics
Oxford college:
Balliol College
Role:
Author
Publisher:
University of Oxford Publisher's website
Article number:
956
Series:
Department of Economics Discussion Paper Series
Publication date:
2021-12-16
Paper number:
956
Language:
English
Keywords:
Pubs id:
1225447
Local pid:
pubs:1225447
Deposit date:
2021-12-16

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