FRBSF Economic Letters

Economic analysis for a general audience

Jens H.E. Christensen


Supply and demand imbalances associated with the COVID-19 pandemic have contributed to a sharp increase in price inflation since early 2021. In response, market-based measures of short-term inflation compensation have risen sharply in the United States. Survey-based measures suggest that this has not affected longer-term inflation expectations. However, analyzing the difference between market prices of standard and inflation-indexed government bonds provides tentative indications that investors have raised their 10-year inflation expectations since spring 2021 to levels above their historical range.

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Analysis of current economic developments and the outlook

Western Economic Developments

Western Economic Developments is linked to via Fed in Print only.

Working Papers

The latest in economic research

Cynthia Balloch, Yann Koby, and Mauricio Ulate

Several advanced economies implemented negative nominal interest rates in the middle of the last decade, seeking to provide further monetary accommodation once cuts in positive territory had been exhausted. Negative rates affect banks in novel ways, mostly because during times of negative policy rates the interest rate that banks pay households on their deposits usually remains close to zero. In this review, we analyze the large literature that studies the impact of negative nominal interest rates, proceeding in four steps. First, we explain the theoretical channels through which negative rates affect banks. Second, we discuss the empirical findings about bank outcomes under negative rates. Third, we describe the aggregate transmission channels that influence the macroeconomic implications of a policy rate cut in negative territory. Finally, we compare the general-equilibrium models that have been used to quantify the effectiveness of negative rates and highlight why they have obtained mixed results. We conclude that, if properly implemented, negative rates are a valuable tool that central banks should not discard outright. However, negative rates can have quantifiable costs for the financial sector, and their effectiveness is likely to decline if implemented for long periods.

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