Is there a zero lower bound? The effects of negative policy rates on banks and firms ECB Working Paper, No. 2289

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This paper evaluates the macroeconomic effects of purchases of long-term sovereign bonds by a central bank in a monetary union when (1) the private sector faces tight financial conditions and (2) the zero lower bound (ZLB) on the policy rate holds. To this end, we calibrate a dynamic general equilibrium model to the euro area (EA). We assume that households in one member country have a large initial debt position and are subject to a borrowing constraint. We simulate the effects of a negative EA-wide demand shock that induces a decline in inflation. The main results are as follows. First, the reduction in inflation amplifies the domestic and cross-country spillovers of the negative demand shock because of the country-specific borrowing constraint and the ZLB. Second, sovereign bond purchases boost economic activity and, hence, indirectly allow households to reduce their debt and relax the borrowing constraint. Third, the new, lower value of debt allows households to smooth consumption, fostering macroeconomic resilience not only in the member country concerned but also in the rest of the monetary union.

This paper evaluates the macroeconomic and financial effects of the Eurosystem's Asset Purchase Programme (APP) and its interaction with a member country's macroprudential policy. We assume that some households in a euro-area (EA) country are subject to a borrowing constraint, and that their local real estate acts as the collateral. In order to highlight the interaction between the APP and region-specific macroprudential policies, we simulate a situation in which, as the APP is carried out, households in one EA region develop overly optimistic expectations about local real estate prices. We report four main findings. First, a relatively large loan-to-value (LTV) ratio in one region can greatly amplify the expansionary effect of the union-wide non-standard monetary policy measures on domestic households' borrowing. Second, while the APP is being implemented, an increase in households' borrowing in one region can be further magnified by the combination of a high LTV ratio and overly optimistic expectations. Third, region-specific macroprudential measures can stabilize private sector borrowing with limited negative effects on economic activity. Fourth, our results hold also in the case of area-wide overly optimistic expectations.

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In this paper we examine the empirical features of both the business and financial cycles in Italy. We employ univariate and multivariate trend-cycle decompositions based on unobserved component models. Univariate estimates highlight the different cyclical properties (persistence, duration and amplitude) of real GDP and real credit to the private sector. Multivariate estimates uncover the presence of feedback effects between the real and financial cycles. At the same time, in the most recent period (2015-2016), the multivariate approach highlights a wider output gap than that estimated by the univariate models considered in this paper.JEL Classification: C32, E32, E44.