Brunnermeier's Research on Potential Contractionary Effects of Ultra Low Interest Rates

Wednesday, Jun 7, 2017
by vrosenth

A recent paper by Markus Brunnemeier and Yann Koby finds that below a certain threshold lowering the interest rate becomes "contractionary for lending."  They call the tipping the "reversal rate.''  It occurs when recapitalization gain from the duration mismatch are offset by decreases in net interest margins, lowering banks' net worth and tightening its capital constraint.  It is hard to pinpoint when the reversal rate kicks in.  According to Brunnermeier, US banks appear to be out of the danger zone judging by their  healthy profits and lending volumes.  But, he says, "in Europe it's very different.  The banks there are still in the reversal range."   To learn more about this research visit Markus Brunnermeir'r research webpage, the title of the paper is “The Reversal Interest Rate: The Effective Lower Bound of Monetary Policy."