The Effective Lower Bound for the Policy Rate in Euroized Economies

The Effective Lower Bound for the Policy Rate in Euroized Economies—An Application to the Case of Albania

By Guido della Valle, Erald Themeli, Romain M Veyrune, Ezequiel Cabezon, Shaoyu Guo

March 13, 2018

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Format: Chicago

Guido della Valle, Erald Themeli, Romain M Veyrune, Ezequiel Cabezon, and Shaoyu Guo. The Effective Lower Bound for the Policy Rate in Euroized Economies—An Application to the Case of Albania, (USA: International Monetary Fund, 2018) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Based on the experience of the Bank of Albania, the paper proposes a framework to estimate the interest rate lower bound in small, open, and euroized economies. The paper introduces a stylized monitoring tool to assess the unintended consequences of low policy rates. The paper is the first attempt to estimate the impact of low interest rate on the public’s demand for banknote by denomination. A strong preference for banknotes leads economic agents to require a higher remuneration of banks’ deposits, lifting the lower bound above zero. Financial euroization also lifts the lower policy bound due to the higher propensity of substituting domestic with foreign currency–denominated assets as a function of the interest rate differential. Policies aiming at reducing financial euroization contribute to bring down the lower bound.

Subject: Bank deposits, Banking, Central bank policy rate, Currencies, Deposit rates, Exchange rates, Financial services, Foreign exchange, Money

Keywords: Albania, Bank deposits, Banking system, Central bank policy rate, Currencies, Demand, Deposit, Deposit rate, Deposit rates, Euroization, Exchange rates, Global, Interest rate, Interest rate differential, Interest rate level, Interest rate lower bound, Interest rate margin, Lek-euro interest rate, Monetary policy, Monetary policy pass-through, Nominal interest rate, Time deposit, Transmission mechanism, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/055
Stock No:

WPIEA2018055
ISBN:

9781484345313
ISSN:

1018-5941

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