Is There a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms
55 Pages Posted: 17 Oct 2019 Last revised: 6 May 2020
Date Written: October 2019
Exploiting confidential data from the euro area, we show that sound banks pass on negative rates to their corporate depositors without experiencing a contraction in funding and that the degree of pass-through becomes stronger as policy rates move deeper into negative territory. The negative interest rate policy provides stimulus to the economy through firms' asset rebalancing. Firms with high cash-holdings linked to banks charging negative rates increase their investment and 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 at the zero lower bound.
Keywords: corporate channel, Lending Channel, monetary policy, negative rates
JEL Classification: D2, E43, E52, G21
Suggested Citation: Suggested Citation