IDEAS home Printed from https://ideas.repec.org/p/fip/fedfwp/96029.html
   My bibliography  Save this paper

The Transmission of Negative Nominal Interest Rates in Finland

Author

Listed:

Abstract

Despite the implementation of negative nominal interest rates by several advanced economies in the last decade and the many papers that have been written about this novel policy tool, there is still much we do not know about the effectiveness of this instrument. The pass-through of negative policy rates to loan rates is one of the main points of contention. In this paper, we analyze the pass-through of the ECB’s changes in the deposit facility rate to mortgage rates in Finland between 2005 and 2020. We use monthly data and three different empirical methodologies: correlational event studies, high-frequency identification, and exposure-measure regressions. We provide robust evidence that there continues to be pass-through of a cut in the policy rate to mortgage rates even when the policy rate is in negative territory, but that this pass-through is smaller than when the policy rate is in positive territory. The evidence in this paper contrasts with some previous studies and provides moments that can be useful to discipline theoretical negative-rates models.

Suggested Citation

  • Simon H. Kwan & Mauricio Ulate & Ville Voutilainen, 2023. "The Transmission of Negative Nominal Interest Rates in Finland," Working Paper Series 2023-11, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:96029
    DOI: 10.24148/wp2023-11
    as

    Download full text from publisher

    File URL: https://www.frbsf.org/wp-content/uploads/sites/4/wp2023-11.pdf
    File Function: Full text - article PDF
    Download Restriction: no
    File URL: https://libkey.io/10.24148/wp2023-11?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Mr. Luis Brandao-Marques & Mr. Roland Meeks & Gunes Kamber, 2021. "Negative Interest Rates: Taking Stock of the Experience So Far," IMF Departmental Papers / Policy Papers 2021/003, International Monetary Fund.
    2. de Groot, Oliver & Haas, Alexander, 2023. "The signalling channel of negative interest rates," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 87-103.
    3. Gauti B Eggertsson & Ragnar E Juelsrud & Lawrence H Summers & Ella Getz, 2024. "Negative Nominal Interest Rates and the Bank Lending Channel," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(4), pages 2201-2275.
    4. Bats, Joost V. & Giuliodori, Massimo & Houben, Aerdt C.F.J., 2023. "Monetary policy effects in times of negative interest rates: What do bank stock prices tell us?," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    5. Bottero, Margherita & Minoiu, Camelia & Peydró, José-Luis & Polo, Andrea & Presbitero, Andrea F. & Sette, Enrico, 2022. "Expansionary yet different: Credit supply and real effects of negative interest rate policy," Journal of Financial Economics, Elsevier, vol. 146(2), pages 754-778.
    6. Amzallag, Adrien & Calza, Alessandro & Georgarakos, Dimitris & Sousa, João, 2019. "Monetary policy transmission to mortgages in a negative interest rate environment," Working Paper Series 2243, European Central Bank.
    7. Joseph Abadi & Markus Brunnermeier & Yann Koby, 2023. "The Reversal Interest Rate," American Economic Review, American Economic Association, vol. 113(8), pages 2084-2120, August.
    8. Onofri, Marco & Peersman, Gert & Smets, Frank, 2023. "The effectiveness of a negative interest rate policy," Journal of Monetary Economics, Elsevier, vol. 140(C), pages 16-33.
    9. Mr. Gee Hee Hong & John Kandrac, 2018. "Pushed Past the Limit? How Japanese Banks Reacted to Negative Interest Rates," IMF Working Papers 2018/131, International Monetary Fund.
    10. Ampudia, Miguel & Van den Heuvel, Skander J., 2022. "Monetary Policy and Bank Equity Values in a Time of Low and Negative Interest Rates," Journal of Monetary Economics, Elsevier, vol. 130(C), pages 49-67.
    11. Florian Heider & Farzad Saidi & Glenn Schepens, 2019. "Life below Zero: Bank Lending under Negative Policy Rates," The Review of Financial Studies, Society for Financial Studies, vol. 32(10), pages 3728-3761.
    12. Lopez, Jose A. & Rose, Andrew K. & Spiegel, Mark M., 2020. "Why have negative nominal interest rates had such a small effect on bank performance? Cross country evidence," European Economic Review, Elsevier, vol. 124(C).
    13. Cynthia Balloch & Yann Koby & Mauricio Ulate, 2022. "Making Sense of Negative Nominal Interest Rates," Working Paper Series 2022-12, Federal Reserve Bank of San Francisco.
    14. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    15. Altavilla, Carlo & Brugnolini, Luca & Gürkaynak, Refet S. & Motto, Roberto & Ragusa, Giuseppe, 2019. "Measuring euro area monetary policy," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 162-179.
    16. Christoph Basten & Mike Mariathasan, 2018. "How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold," CESifo Working Paper Series 6901, CESifo.
    17. Mauricio Ulate, 2021. "Alternative Models of Interest Rate Pass-Through in Normal and Negative Territory," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 3-34, March.
    18. Luis Brandao-Marques & Marco Casiraghi & Gaston Gelos & Gunes Kamber & Roland Meeks, 2021. "Negative Interest Rate Policies: Taking Stock of the Experience So Far," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 22(06), pages 27-32, November.
    19. Basten, Christoph & Mariathasan, Mike, 2023. "Interest rate pass-through and bank risk-taking under negative-rate policies with tiered remuneration of central bank reserves," Journal of Financial Stability, Elsevier, vol. 68(C).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fungáécová, Zuzana & Kerola, Eeva & Laine, Olli-Matti, 2023. "Monetary policy transmission below zero," Bank of Finland Research Discussion Papers 11/2023, Bank of Finland.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bats, Joost V. & Giuliodori, Massimo & Houben, Aerdt C.F.J., 2023. "Monetary policy effects in times of negative interest rates: What do bank stock prices tell us?," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    2. repec:fip:fedfwp:96083 is not listed on IDEAS
    3. Cynthia Balloch & Yann Koby & Mauricio Ulate, 2022. "Making Sense of Negative Nominal Interest Rates," Working Paper Series 2022-12, Federal Reserve Bank of San Francisco.
    4. Darracq Pariès, Matthieu & Kok, Christoffer & Rottner, Matthias, 2023. "Reversal interest rate and macroprudential policy," European Economic Review, Elsevier, vol. 159(C).
    5. Grandi, Pietro & Guille, Marianne, 2023. "Banks, deposit rigidity and negative rates," Journal of International Money and Finance, Elsevier, vol. 133(C).
    6. Altavilla, Carlo & Burlon, Lorenzo & Giannetti, Mariassunta & Holton, Sarah, 2022. "Is there a zero lower bound? The effects of negative policy rates on banks and firms," Journal of Financial Economics, Elsevier, vol. 144(3), pages 885-907.
    7. Joscha Beckmann & Klaus-Jürgen Gern & Nils Jannsen, 2022. "Should they stay or should they go? Negative interest rate policies under review," International Economics and Economic Policy, Springer, vol. 19(4), pages 885-912, October.
    8. Schelling, Tan & Towbin, Pascal, 2021. "Tiers of Joy? Reserve Tiering and Bank Behavior in a Negative-Rate Environment," CEPR Discussion Papers 16191, C.E.P.R. Discussion Papers.
    9. Mauricio Ulate, 2021. "Alternative Models of Interest Rate Pass-Through in Normal and Negative Territory," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 3-34, March.
    10. Marcel Barmeier, 2022. "The new normal: bank lending and negative interest rates in Austria (Marcel Barmeier)," Working Papers 242, Oesterreichische Nationalbank (Austrian Central Bank).
    11. Onofri, Marco & Peersman, Gert & Smets, Frank, 2023. "The effectiveness of a negative interest rate policy," Journal of Monetary Economics, Elsevier, vol. 140(C), pages 16-33.
    12. de Groot, Oliver & Haas, Alexander, 2023. "The signalling channel of negative interest rates," Journal of Monetary Economics, Elsevier, vol. 138(C), pages 87-103.
    13. Aleksander Berentsen & Hugo van Buggenum & Romina Ruprecht, 2020. "On the negatives of negative interest rates and the positives of exemption thresholds," ECON - Working Papers 372, Department of Economics - University of Zurich.
    14. Boungou, Whelsy, 2021. "Empirical evidence of the lending channel of monetary policy under negative interest rates," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 309-318.
    15. policy, Work stream on macroprudential & Policy, Monetary & Stability, Financial & Albertazzi, Ugo & Martin, Alberto & Assouan, Emmanuelle & Tristani, Oreste & Galati, Gabriele & Vlassopoulos, Thomas , 2023. "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area," Occasional Paper Series 272, European Central Bank.
    16. Roberto Savona, 2022. "Bank business models, negative policy rates, and prudential regulation," Annals of Finance, Springer, vol. 18(3), pages 355-392, September.
    17. Mattia Girotti & Guillaume Horny & Jean-Guillaume Sahuc, 2022. "Lost in Negative Territory? Search for Yield!," EconomiX Working Papers 2022-10, University of Paris Nanterre, EconomiX.
    18. policy, Work stream on macroprudential & Albertazzi, Ugo & Martin, Alberto & Assouan, Emmanuelle & Tristani, Oreste & Galati, Gabriele & Vlassopoulos, Thomas, 2021. "The role of financial stability considerations in monetary policy and the interaction with macroprudential policy in the euro area," Occasional Paper Series 272, European Central Bank.
    19. Altunbas, Yener & Avignone, Giuseppe & Kok, Christoffer & Pancaro, Cosimo, 2023. "Euro area banks’ market power, lending channel and stability: the effects of negative policy rates," Working Paper Series 2790, European Central Bank.
    20. Oliver de Groot & Alexander Haas, 2020. "The Negative Interest Rate Policy Experiment," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 21(01), pages 7-12, April.
    21. Bubeck, Johannes & Maddaloni, Angela & Peydró, José-Luis, 2020. "Negative Monetary Policy Rates and Systemic Banks' Risk‐Taking: Evidence from the Euro Area Securities Register," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 52(S1), pages 197-231.

    More about this item

    Keywords

    negative nominal interest rates; Finland; European Central Bank (ECB); negative rates; mortgage rates;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedfwp:96029. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Federal Reserve Bank of San Francisco Research Library (email available below). General contact details of provider: https://edirc.repec.org/data/frbsfus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.