Weak banks could reverse effects of policy rate cuts – ECB paper

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ECB headquarters

The European Central Bank

Loosening monetary policy could have a contractionary rather than expansionary effect under certain circumstances, a working paper published by the European Central Bank argues.

In Reversal interest rate and macroprudential policy, Matthieu Darracq Pariès, Christoffer Kok and Matthias Rottner say that central banks can make this less likely if they impose counter-cyclical buffers on the banking sector.  

The authors use a non-linear macroeconomic model calibrated to the eurozone economy. They

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