The Reversal Interest Rate

https://scholar.princeton.edu/sites/default/files/markus/files/20p_reversalrate.pdf





The “reversal interest rate” is the rate at which accommodative monetary policy
“reverses” its intended effect and becomes contractionary for the economy.



...we argue in this paper that the
effective lower bond is given by the “reversal interest rate”, the rate at which accommodative
monetary policy “reverses” its effect and becomes contractionary for output. Below the “reversal interest rate”, a decrease in the monetary policy rate depresses rather than stimulates
the economy.
Importantly, the reversal interest rate is not (necessarily) zero.



Hence, unlike what some
commentators suggest, negative interest rates are not fundamentally different. In our model,
when the reversal interest rate is positive, say 1 %, then a policy rate cut from 1% to 0.9%
is already contractionary. On the other hand, if the reversal interest rate is -1 %, there is
room to go negative up to that point.



The exact level of the reversal interest rate depends...



...Quantitative easing (QE) increases the reversal interest rate, as it takes fixed income out
of the balance sheets of the banks. In that sense, QE should only employed after interest
rate cuts are exhausted.



 ... exceedingly long low interest rate
environments can depress lending in this setting.