The Reversal Interest Rate

Joseph Abadi, Markus Brunnermeier, Yann Koby

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)2084-2120
Number of pages37
JournalAmerican Economic Review
Volume113
Issue number8
DOIs
StatePublished - Aug 2023

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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