The Unintended Consequences of the Zero Lower Bound Policy

Abstract

We study the impact of the zero lower bound interest rate policy on the industrial organization of the U.S. money fund industry. We find that in response to policies that maintain low interest rates, money funds: change their product offerings by investing in riskier asset classes; are more likely to exit the market; and reduce the fees they charge their investors. The consequence of fund closures resulting from interest rate policy is the relocation of resources in affected fund families and in the asset management industry in general, as well as decline in capital of issuers borrowing from money funds.

Keywords: Quantitative easing, money market funds, reaching for yield, risk taking, fund exit, unconventional monetary policy

JEL Classification: E52, G23, G28