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 on to their corporate depositors without experiencing a contraction in funding and that the tendency to charge negative rates becomes stronger as policy rates move deeper into negative territory. The negative interest rate policy (NIRP) provides 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 common 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