As I said earlier, the “physical lower bound” of nominal interest rates, at which disintermediation risk will materialise, is imposed by the opportunity cost of holding cash. But is there an “economic lower bound”, different from the physical one, where further rate cuts cease to provide aggregate stimulus to the economy?
This economic lower bound could then potentially but not necessarily impose an earlier binding constraint for monetary policy. Indeed, in the current discussion, it has been suggested that at some point the level of rates can become low to the extent that the detrimental effects on the banking sector outweigh the benefits of lower rates.