Banks, Low Interest Rates, and Monetary Policy Transmission

Departement d'Economie et Sciences de la Décision

Intervenant :  Olivier Wang (NYU Stern)

Salle T-020

Abstract :

I study how the secular decline in interest rates affects bank lending and monetary policy transmission, highlighting the distinction between short-run and long-run effects. A rate cut stimulates lending and output in the short run, but the expansionary effect weakens at low rates, even before the zero lower bound binds. If the rate decline persists, lending contracts in the long run: deposit spreads are lower, which over time decreases retained earnings, equity and lending, and increases loan spreads. I find support for the model’s predictions in U.S. aggregate and cross-sectional data.