TY - JOUR
T1 - The Reversal Interest Rate
AU - Abadi, Joseph
AU - Brunnermeier, Markus
AU - Koby, Yann
N1 - Publisher Copyright:
© 2023 American Economic Association. All rights reserved.
PY - 2023/8
Y1 - 2023/8
N2 - 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.
AB - 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.
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U2 - 10.1257/aer.20190150
DO - 10.1257/aer.20190150
M3 - Article
AN - SCOPUS:85167923184
SN - 0002-8282
VL - 113
SP - 2084
EP - 2120
JO - American Economic Review
JF - American Economic Review
IS - 8
ER -