Is there a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms

56 Pages Posted: 11 Jun 2019

See all articles by Carlo Altavilla

Carlo Altavilla

European Central Bank (ECB)

Lorenzo Burlon

European Central Bank (ECB)

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Sarah Holton

European Central Bank (ECB)

Date Written: June 7, 2019

Abstract

Exploiting confidential data from the euro area, we show that sound banks can pass negative rates on to their corporate depositors without experiencing a contraction in funding. These pass-through effects become stronger as policy rates move deeper into negative territory. Banks offering negative rates provide more credit than other banks suggesting that the transmission mechanism of monetary policy is not hampered. The negative interest rate policy (NIRP) provides further stimulus to the economy through firms’ asset rebalancing. Firms with high current assets linked to banks offering negative rates appear to increase their investment in tangible and intangible assets and to decrease their cash holdings to avoid the costs associated with negative rates. Overall, our results challenge the commonly held view that conventional monetary policy becomes ineffective when policy rates reach the zero lower bound.

Keywords: monetary policy, negative rates, lending channel, corporate channel

JEL Classification: E52, E43, G21, D22, D25

Suggested Citation

Altavilla, Carlo and Burlon, Lorenzo and Giannetti, Mariassunta and Holton, Sarah, Is there a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms (June 7, 2019). ECB Working Paper No. 2289 (2019); ISBN 978-92-899-3551-7 . Available at SSRN: https://ssrn.com/abstract=3402408

Carlo Altavilla (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Lorenzo Burlon

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Mariassunta Giannetti

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Sarah Holton

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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