Negative Nominal Interest Rates and the Bank Lending Channel.

This article investigates the bank lending channel of negative nominal policy rates using detailed Swedish bank-level data and a theoretical banking sector model. Empirically, it finds that retail household deposit rates face a deposit lower bound (DLB) near zero, causing a collapse in the pass-through of negative policy rates to mortgage lending rates and credit volumes once the DLB is reached; banks with higher deposit shares reduce lending less and experience declines in equity values following further policy rate cuts below the DLB. The theoretical model incorporates these empirical findings, deriving a sufficient statistic based on banks' balance sheet composition and pass-through rates to determine when negative policy rates are expansionary or contractionary. Quantitative simulations calibrated to Swedish data suggest that, given the current institutional framework and banking sector structure, negative policy rates below the DLB may contract output via the bank lending channel, although other transmission channels or institutional changes could alter this outcome. The study highlights the importance of the deposit rate lower bound and banks' net exposure to negative rates in assessing the effectiveness of negative nominal interest rate policies.