Macroeconomic Impacts of Negative Interest Rate Policy (NIRP): Evidence from Denmark, Sweden and Switzerland
This paper investigates the macroeconomic effects of negative interest rate policy (NIRP) in Europe since July 2012, with a focus on Denmark, Sweden and Switzerland. A small open economy model with flexible price and sticky price respectively and a panel VAR method are used to study the difference of NIRP instruments in stimulating the European economy, compared to the non-negative rate cases. This theoretical model has been proved to be very supportive of empirical findings in many aspects. I find that NIRP indeed changes the direction of reactions of many key macroeconomic indicators to a policy rate shock and there is evidence showing the existence of structural break at the announcement of NIRP. The Granger causality relationships among the selected macroeconomic variables have been strengthened by NIRP and monetary policy becomes more effective in several sectors, especially in foreign exchange rate and international trade. But this stronger influence is less persistent. Besides, NIRP may also create potential threats to financial stability, such as foreign debt, but this harm might be mitigated by greater price stickiness.
Chen, Junwei, "Macroeconomic Impacts of Negative Interest Rate Policy (NIRP): Evidence from Denmark, Sweden and Switzerland" (2018). ETD Collection for Fordham University. AAI10821868.