Banks, Low Interest Rates, and Monetary Policy Transmission

I study how the secular decline in interest rates affects bank lending and intermediation spreads. A fall in rates stimulates lending in the short run, but if the rate decline persists, lending contracts in the long run. Even when rates are well above the zero lower bound, lower rates compress deposit spreads due to the competition between money and deposits. This hurts retained earnings, equity, and ultimately lending, until loan spreads have risen enough to offset the reduction in deposit spreads and stabilize bank net interest income. A departure from the Friedman rule in the form of a higher inflation target can support bank lending at the cost of higher liquidity premia. I find support for the model’s predictions in U.S. aggregate and cross-sectional data.

JEL Classification: E4, E5, G2

Suggested Citation: Suggested Citation

Wang, Olivier, Banks, Low Interest Rates, and Monetary Policy Transmission (December 30, 2018). Journal of Finance, forthcoming, Available at SSRN: https://ssrn.com/abstract=3520134 or http://dx.doi.org/10.2139/ssrn.3520134

Olivier Wang (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States