Abstract
This paper explains negative nominal interest rates in a general equilibrium model with a role for financial intermediation. Key implications of the model are shown to be consistent with empirical evidence from US data. We use the model to show first that, while banks increase output, they fall short of implementing efficiency. We show next that implementing the planner’s steady state requires firms to be bound to collateral requirements that limit their leverage. Finally, and most importantly, we show that the decentralization of the planner’s steady state also requires a zero nominal lending rate on bank loans to firms, as well as a negative nominal lending rate on central bank loans to banks - a result which may go some way towards providing a rationale for the ultra-low rates policy implemented by major central banks in the second half of the 2010’s and early 2020’s.