On the robustness of negative interest rate policies: Evidence from random trade modeling

boughabi, houssam (2026): On the robustness of negative interest rate policies: Evidence from random trade modeling. Forthcoming in:

Abstract

This paper investigates the impact of low-interest rate policies on export performance in a small open economy under stochastic inflation and interest rate volatility, using Switzerland as a natural laboratory. We develop a continuous-time stochastic framework linking exports to inflation dynamics and policy-controlled short rates and implement Monte Carlo simulations to evaluate export trajectories under uncertainty. The results show that negative interest rates significantly support export performance despite deflationary pressures, while the effectiveness of the policy is largely invariant to the persistence (memory) of interest rate volatility. By integrating numerical modelling with approximation in a multi-periodic setting, the study provides both a methodological contribution and evidence on the trade channel of unconventional monetary policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: interest rates; export dynamics; inflation volatility; stochastic modeling; monetary policy; Switzerland
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

References

Assenmacher K, Gerlach S (2018) The Swiss negative interest rate policy. Swiss J Econ Stat 154: 1–28. Björk T (2009) Arbitrage theory in continuous time. Oxford: Oxford University Press. Blanchard O (2003) Macroeconomics, 3rd ed. Prentice Hall. Borio C, Filardo A (2004) Low inflation, pass-through, and monetary policy. BIS Work Pap 157. Campbell JY, Lo AW, MacKinlay AC (1997) The econometrics of financial markets. Princeton: Princeton University Press. Christiano LJ, Eichenbaum M, Rebelo S (2011) When is the government spending multiplier large? J Polit Econ 119: 78–121. Clarida R, Galí J, Gertler M (2001) Monetary policy rules and macroeconomic stability. Q J Econ 116: 147–180. Corsetti G, Pesenti P (2005) International dimensions of optimal monetary policy. J Monet Econ 52: 281–305. Cox JC, Ingersoll JE, Ross SA (1985) A theory of the term structure of interest rates. Econometrica 53: 385–407. Dornbusch R (1980) Exchange rate economics: Where do we stand? Brook Pap Econ Act 1: 143–185. Duffie D, Kan R (1996) A yield-factor model of interest rates. Math Financ 6: 379–406. Eggertsson GB, Juelsrud RE, Wold EG (2017) Negative nominal interest rates and the bank lending channel. J Monet Econ 84: 30–46. Fischer S (2017) Monetary policy under low inflation. J Econ Perspect 31: 15–36. Galí J (2008) Monetary policy, inflation, and the business cycle. Princeton: Princeton University Press. Glasserman P (2004) Monte Carlo methods in financial engineering. New York: Springer. Goodfriend M (2004) Monetary policy in the new era. Fed Reserve Bank Richmond Econ Q 90: 1–20. Gourieroux C, Monfort A (1996) Simulation-based inference: A survey. J Econometrics 71: 5–33. Hamilton JD (1994) Time series analysis. Princeton: Princeton University Press. Hansen LP, Sargent TJ (2007) Robustness. Princeton: Princeton University Press. Harrison JM, Kreps DM (1979) Martingales and arbitrage in multiperiod securities markets. J Econ Theory 20: 381–408. Jordan T (2016) The Swiss National Bank and negative interest rates. Swiss J Econ Stat 152: 1–14. Judd KL (1998) Numerical methods in economics. Cambridge: MIT Press. Karatzas I, Shreve S (1991) Brownian motion and stochastic calculus. New York: Springer. Kloeden PE, Platen E (1992) Numerical solution of stochastic differential equations. Berlin: Springer. Krugman P (1998) It’s baaack: Japan’s slump and the return of the liquidity trap. Brook Pap Econ Act 2: 137–205. Kugler P, Weder R (2004) Negative interest rates: Lessons from Switzerland. Econ Policy Rev 10: 45–61. Lane PR, Milesi-Ferretti GM (2004) International financial integration. IMF Staff Pap 51: 1–45. Merton RC (1973) Theory of rational option pricing. Bell J Econ Manag Sci 4: 141–183. Obstfeld M, Rogoff K (1996) Foundations of international macroeconomics. Cambridge: MIT Press. Øksendal B (2003) Stochastic differential equations. Berlin: Springer. Reichlin L (2016) Understanding macroeconomic shocks: Lessons from policy simulations. J Econ Dyn Control 68: 5–28. Romer D (1993) Openness and inflation: Theory and evidence. NBER Work Pap 4366. Svensson LEO (2003) Monetary policy and inflation targeting. Princeton: Princeton University Press. Vasicek O (1977) An equilibrium characterization of the term structure. J Financ Econ 5: 177–188. Woodford M (2011) Interest and prices: Foundations of a theory of monetary policy. Princeton: Princeton University Press.