The Reversal Interest Rate
American Economic Review
vol. 113,
no. 8, August 2023
(pp. 2084-2120)
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.Citation
Abadi, Joseph, Markus Brunnermeier, and Yann Koby. 2023. "The Reversal Interest Rate." American Economic Review, 113 (8): 2084-2120. DOI: 10.1257/aer.20190150Additional Materials
JEL Classification
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
- E32 Business Fluctuations; Cycles
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- L25 Firm Performance: Size, Diversification, and Scope