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Comparison of the Impact of Negative Real and Nominal Interest Rates on the Banking Sector and Lending to the Economy

Student: Elena Korneeva

Supervisor: Sergey E. Pekarski

Faculty: Faculty of Economic Sciences

Educational Programme: Applied Economics (Master)

Year of Graduation: 2020

In the period after the financial crisis of 2007-2008, many countries faced problems of low economic growth and inflation due to weak demand in the economy. To stimulate lending and raise inflation expectations, Central banks resorted to unconventional monetary policy methods, and then introduced negative interest rate policy. Quite a lot of economic papers is devoted to the study of lending and profitability in an environment where Central banks set negative rates on excess reserves, forcing banks to reallocate their liquid assets. At the same time, there is no cases of comparison with the periods when the real negative interest rate operates in the economies, while the dynamics of many indicators of banks can be determined primarily by it. This paper is devoted to the study of lending and profitability of credit institutions in Germany in the conditions of negative real and nominal interest rates. Panel data on 1,220 German banks were evaluated using dummy variables for periods when the real interest rate assumed negative values and also using a regime switching model (threshold model). As a result, we can conclude that lending and income of commercial banks in Germany depend not so much on the policy, but on the level of rates in the economy and the way the bank is funded.

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