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CNB > Economic research > Research publications > CNB Working paper series > 2018 > Estimating the Effective Lower Bound on the Czech National Bank’s Policy Rate

Estimating the Effective Lower Bound on the Czech National Bank’s Policy Rate

Dominika Kolcunová, Tomáš Havránek

This paper focuses on the estimation of the effective lower bound on the Czech National Bank’s policy rate. The effective lower bound is determined by the value below which holding and using cash would be preferable to holding deposits with negative yields. This bound is approximated on the basis of the storage, insurance and transport costs of cash and the loss of convenience associated with cashless payments. This estimate is complemented by a calculation based on interest charges reflecting the impact of negative rates on banks’ profitability. Overall, we get a mean of slightly below –1%, approximately in the interval (–2.0%, –0.4%). In addition, by means of a vector autoregression we show that the potential of negative rates is not sufficient to deliver monetary policy easing similar in its effects to the impact of the Czech National Bank’s exchange rate commitment during the years 2013–2017.

JEL codes: E43, E44, E52, E58

Keywords: Costs of cash, effective lower bound, negative interest rates, transmission of monetary policy, zero lower bound

Issued:       September 2018

Download: CNB WP No. 9/2018 (pdf, 474 kB)