Key Findings

This paper shows the possibility of negative nominal interest rates in a general equilibrium model with financial intermediation. It establishes that the decentralization of the planner’s steady state requires:

1. a zero nominal lending rate on bank loans to firms, and

2. a negative nominal lending rate on central bank loans to banks.

The research also finds that implementing the best steady state requires firms to be bound by collateral requirements that limit their leverage.

The key driver of the results is the defining characteristic of banking: banks’ ability to create money by opening deposit accounts that borrowers can withdraw from, even when unbacked by household deposits.

Broader Significance

1. The model’s implications are consistent with historical empirical trends in the United States and help rationalize the ultra-low interest rate policies implemented by major central banks during 2014–2022.

2. Specifically, the study examines both equilibrium and first-best allocations, finding that:

• While banks stimulate capital accumulation and output, the best steady state cannot generally be reached as a pure market outcome if the central bank focuses only on nominal rates.

• A utilitarian social planner’s allocations can, however, be decentralized if collateral requirements are also imposed.

• Market implementation of the planner’s steady state requires a zero nominal rate for bank loans to firmsand a negative nominal rate for central bank loans to banks.

The research highlights how bank money creation allows households to bridge the gap between their willingness to trade today’s consumption for tomorrow’s and the actual return on deposits or capital. Without this mechanism, firms would face tighter credit, higher investment costs, and households would inefficiently delay consumption—moving the economy away from the socially optimal allocation.

Research Context

This publication builds on Prof. Dávila’s FDCRGP project:
“Monetary policies and the leverage cycle without a zero lower bound for interest rates” (2022–2024).

Contact Information

For further details, interviews, or access to the full article, please contact:

• Prof. Julio Dávila, Department of Economics, Nazarbayev University

• Dr. Elizaveta Lukmanova, Central Bank of Ireland