term domestic and international implications of NIRP. Specifically, it addresses the following questions:

- Why are some monetary policy rates negative?

- How do transmission channels of monetary policy operate under NIRP?

- How have key financial variables evolved since the introduction of NIRP?

- How could NIRP affect financial stability?

- What are the implications of NIRP for EMDEs?

The rest of the paper is organized as follows. Section 2 presents the context and motivation for implementing NIRP. Section 3 briefly examines the major transmission channels of monetary policy under NIRP. Section 4 analyzes changes in key financial variables after the introduction of NIRP. Following the recent literature on the effects of quantitative easing (QE) policy announcements, this section also uses an event study to assess the initial domestic market reactions to NIRP announcements.<sup>4</sup> Section 5 explores financial stability implications. Section 6 examines spillovers from NIRP to EMDEs and policy responses to mitigate possible adverse effects. Section 7 concludes.

# **2. Why are some monetary policy rates negative?**

Monetary policy across advanced economies has had to deal, since the global financial crisis, with weak demand and below-target inflation. Globally, a lack of investment combined with abundant savings and a diminishing pool of highly-rated low-risk fixed income assets have been associated with a secular decline in the equilibrium real rate of interest (Summers 2014; Rachel and Smith 2015; Bean et al. 2015).<sup>5</sup> These circumstances help explain why, in a context of continued growth disappointments and rising deflation risks, and with limited support from fiscal and structural policies, a number of central banks have decided, in addition to previous unconventional monetary policy measures, to cut policy rates to negative levels and thus provide additional accommodation. The central banks implementing NIRP are now charging (instead of paying) commercial banks for their excess reserves, effectively taxing banks for hoarding cash.

Commercial banks hold deposits at their central bank for two main reasons: to settle interbank transactions and to meet legal minimum reserve requirements. In return for commercial banks’ excess reserves (i.e., reserves above the required minimum level), central banks may pay interest,

> brief reviews of various aspects of NIRP. IMF (2016a) analyzes the implications of NIRP in the euro area. Bech and Malkhozov (2016) examine operational aspects of NIRP.

> 4 An empirical investigation of broader macroeconomic effects of NIRP would require longer time series to conduct counterfactual analysis and disentangle the role of different factors and policies.

> 5 Although estimates vary and are subject to significant measurement uncertainty, real equilibrium rates have been estimated to be only marginally above zero in the United States and slightly negative in the euro area at present (Holston, Laubach and Williams 2016). Given the ECB’s inflation target of close but below 2 percent, the neutral nominal rate of interest could currently be as low as 11⁄2 percent in the euro area, implying that policy rates of zero might not deliver strong enough stimulus in the face of persistent economic headwinds.

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