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

Abstract

Exploiting confidential data from the euro area, we show that sound banks pass negative rates onto their corporate depositors and that the pass-through is not impaired when policy rates move deeper into negative territory. We do not observe a contraction in deposits. When their banks charge negative rates on deposits, firms with ex ante high liquidity increase their investment and decrease their liquid holdings. These results challenge the common view that conventional monetary policy becomes ineffective at the zero lower bound and indicate a novel mechanism of transmission that goes through high-liquidity firms’ assets rebalancing.

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

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