{
  "title": "The Effective Lower Bound for the Policy Rate in Euroized Economies—An Application to the Case of Albania",
  "publication": "IMF Working Papers, March 13, 2018",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2018/03/13/the-effective-lower-bound-for-the-policy-rate-in-euroized-economies-an-application-to-the-45690",
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  "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.",
  "sections": [
    {
      "heading": "Summary and objective",
      "content": "- Authors: Guido della Valle, Erald Themeli, Romain M Veyrune, Ezequiel Cabezon, Shaoyu Guo\n- Date: March 13, 2018\n- Objective: Propose a framework to estimate the interest rate lower bound in small, open, and euroized economies based on the experience of the Bank of Albania and introduce a stylized monitoring tool to assess unintended consequences of low policy rates."
    },
    {
      "heading": "Key findings",
      "content": "- The paper is the first attempt to estimate the impact of low interest rates on the public’s demand for banknotes by denomination.\n- A strong preference for banknotes leads economic agents to require a higher remuneration of banks’ deposits, lifting the lower bound above zero.\n- Financial euroization lifts the lower policy bound because of a higher propensity to substitute domestic with foreign currency–denominated assets as a function of the interest rate differential.\n- Policies aiming at reducing financial euroization contribute to bringing down the lower bound."
    },
    {
      "heading": "Stylized monitoring tool and approach",
      "content": "- Framework: Estimation of the interest rate lower bound tailored to small, open, euroized economies drawing on Bank of Albania experience.\n- Tool: Stylized monitoring instrument to assess unintended consequences of low policy rates, including denomination-specific demand for banknotes and deposit substitution behavior."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Monitor banknote demand by denomination as part of central bank assessment of the effective lower bound.\n- Address strong public preference for banknotes to avoid upward pressure on the required remuneration of deposits.\n- Implement policies to reduce financial euroization to lower the effective policy-rate lower bound.\n- Consider the interest rate differential’s role in currency substitution when designing monetary policy and macrofinancial safeguards."
    },
    {
      "heading": "Subject areas and keywords (as listed)",
      "content": "- Subject: Bank deposits, Banking, Central bank policy rate, Currencies, Deposit rates, Exchange rates, Financial services, Foreign exchange, Money\n- 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\n\nIMF Working Paper — The Effective Lower Bound for the Policy Rate in Euroized Economies—An Application to the Case of Albania (March 13, 2018) by Guido della Valle et al.\n\n---\n\n Content in this bundle\n\n- The Effective Lower Bound for the Policy Rate in Euroized Economies, WP/18/55, March 2018\n  - The Effective Lower Bound for the Policy Rate in Euroized Economies, WP/18/55, March 2018 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - The Effective Lower Bound for the Policy Rate in Euroized Economies, WP/18/55, March 2018 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2018/03/13/the-effective-lower-bound-for-the-policy-rate-in-euroized-economies-an-application-to-the-45690"
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    "Authors: Guido della Valle, Erald Themeli, Romain M Veyrune, Ezequiel Cabezon, Shaoyu Guo",
    "Published: March 13, 2018",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781484345313.001",
    "Authors: Guido della Valle, Erald Themeli, Romain M Veyrune, Ezequiel Cabezon, Shaoyu Guo",
    "Date: March 13, 2018",
    "Objective: Propose a framework to estimate the interest rate lower bound in small, open, and euroized economies based on the experience of the Bank of Albania and introduce a stylized monitoring tool to assess unintended consequences of low policy rates.",
    "The paper is the first attempt to estimate the impact of low interest rates on the public’s demand for banknotes 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 lifts the lower policy bound because of a higher propensity to substitute domestic with foreign currency–denominated assets as a function of the interest rate differential.",
    "Policies aiming at reducing financial euroization contribute to bringing down the lower bound.",
    "Framework: Estimation of the interest rate lower bound tailored to small, open, euroized economies drawing on Bank of Albania experience.",
    "Tool: Stylized monitoring instrument to assess unintended consequences of low policy rates, including denomination-specific demand for banknotes and deposit substitution behavior.",
    "Monitor banknote demand by denomination as part of central bank assessment of the effective lower bound.",
    "Address strong public preference for banknotes to avoid upward pressure on the required remuneration of deposits.",
    "Implement policies to reduce financial euroization to lower the effective policy-rate lower bound.",
    "Consider the interest rate differential’s role in currency substitution when designing monetary policy and macrofinancial safeguards.",
    "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",
    "**The Effective Lower Bound for the Policy Rate in Euroized Economies, WP/18/55, March 2018**"
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