A model of monetary policy with negative lower bound

This article develops a parsimonious model that incorporates fundamental run risk into banks’ optimal decision-making. The model establishes the existence of a reversal rate in negative territory: below this threshold, further policy rate cuts cease to stimulate lending and instead reduce credit supply. This reversal arises from banks’ endogenous trade-off between the returns on credit assets and the liquidity costs associated with bank-run risk.