Loss Averse Depositors and Monetary Policy Around Zero

36 Pages Posted: 7 May 2020 Last revised: 8 May 2020

See all articles by Christian Stettler

Christian Stettler

ETH Zürich - KOF Swiss Economic Institute

Date Written: May 8, 2020


Recent experience from Europe and Japan shows that commercial banks generally pass negative short-term policy rates on to wholesale depositors, such as insurances and pension funds. Yet, they refrain from charging negative rates to ordinary retail customers. This paper asks whether the existing evidence on the inverse relationship between market experience and the degree of loss aversion can explain this transmission pattern. To this end, I allow for loss averse depositors within a simple two-period differentiated products duopoly with switching costs. It turns out that if depositors are especially averse to negative deposit rates, banks keep deposit rates at zero as policy rates decline, while accepting squeezed and possibly negative deposit margins. The lowest current policy rate at which the banking-system is willing to shield depositors from a negative deposit rate decreases with increasing:

i) degrees of loss aversion;

ii) levels of switching costs; and

iii) market expectations about the future policy rate.

A calibration of the model indicates how low central banks could effectively go without taking steps to make paper currency more costly.

Keywords: Deposits, Effective Lower Bound, Loss Aversion, Negative Interest Rates

JEL Classification: D43, E43, E52, E58, G21, L13

Suggested Citation

Stettler, Christian, Loss Averse Depositors and Monetary Policy Around Zero (May 8, 2020). Available at SSRN: https://ssrn.com/abstract=3574089 or http://dx.doi.org/10.2139/ssrn.3574089

Christian Stettler (Contact Author)

ETH Zürich - KOF Swiss Economic Institute ( email )


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