Abstract: Since the negative interest rate policy (NIRP) was first introduced in major economies, there have been heated debates on its effects on banks' profitability and the credit supply. Critics claim that banks' interest margins are heavily squeezed, since banks do not expose retail depositors to negative interest rates. Based on the theory of LCD, we argue that banks’ credit supply is not constrained by deposits, and deposit rates can be deeply negative without curbing banks’ credit supply. We use a micro-founded model to show the quantitative importance of sticky deposit rates in the transmission mechanism of negative interest rates. Simulation results suggest that zero lower bound on deposit rates have impeded the transmission of the NIRP. This may explain the limited effects of the NIRP in Japan and the Euro Area. If there is complete pass-through of the NIRP to deposit rates, central banks should adopt sufficiently deep negative interest rates in the face of a deflationary recession.

Full report ：2018年第2号 Zero Lower Bound on Deposit Rates and Transmission Mechanism of the Negative Interest Rate Policy.pdf