_Diminishing returns from QE._ Evidence suggests that the effectiveness of QE might have diminished over time (Krishnamurthy and Vissing-Jorgensen 2011; Bauer and Neely 2014; Glick and Leduc 2012). In general, event studies of earlier QE programs show larger impacts, as the abatement of market stress, forward guidance, and portfolio balance channels combined to generate more significant effects on financing conditions. Event studies of later QE programs indeed report a smaller impact, potentially indicating diminishing returns over time (Table A.1).

# **3. How do transmission channels of monetary policy operate under NIRP?**

While the underlying motives for the implementation of NIRP vary across central banks, their transmission channels to activity and inflation are conceptually analogous to those of conventional monetary policy.<sup>9</sup> Specifically, NIRP are expected to be transmitted mainly through the interest rate, credit, portfolio, and exchange rate channels. However, under NIRP, there are complications associated with these channels that could limit the effectiveness of policy.

**_Interest rate channel._** Similar to rate cuts in positive territory, cutting policy rates slightly below zero should reduce the rates at which financial intermediaries conduct their borrowing and lending activities. In particular, rate cuts in negative territory can be expected to reduce money market rates and bond yields at the short end of the maturity spectrum.<sup>10</sup> A policy‐induced decline in the short‐term nominal interest rates should result in lower longer‐term nominal interest rates, as ‐ investors arbitrage differences in risk adjusted expected returns across debt securities of different maturities.<sup>11</sup> NIRP could also further compress long-term yields if charging banks for hoarding cash leads to purchases of longer dated debt securities. These effects could combine to lower real interest rates and borrowing costs, thus encouraging households and firms to increase spending and investment.

However, the interest rate channel of monetary policy transmission faces some constraints under NIRP. For example, regarding commercial deposit and lending rates, banks may hesitate to impose negative rates on individual or corporate depositors to prevent a shift to cash or other financial assets that would reduce their deposit base. This tendency, combined with efforts to maintain interest margins, could potentially reduce the pass-through of NIRP to lending rates.<sup>12</sup>

**_Credit channel._** Monetary policy is expected to affect the amount of credit available to households and firms by changing their external finance premium (balance sheet channel or broad credit channel), and by changing banks’ incentive for extending loans (bank lending channel or narrow

> 9 Mishkin (1995) and Boivin, Kiley and Mishkin (2010) present reviews of monetary policy transmission channels.

> 10 DNB Governor Lars Rohde, suggested that the transmission would be similar to positive low interest rates: _“Apart from certain technical difficulties, negative interest rates are, basically, not so different for the financial sector to handle than persistent low interest rates”_ (Rohde 2015).

> 11 The degree to which changes in policy interest rates can affect the long-rates depends, among others, on the monetary policy regime, the credibility of the central bank, the structure of financial markets, and external factors (Walsh 2010; Duffee 2013).

> 12 Waller (2016) argues that NIRP could even have an adverse effect on financing conditions, as banks might increase lending rates or charge higher fees for their activities in order to mitigate any adverse impact of negative rates on their profits.

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