To Decrease or Not to Decrease: The Impact of Zero and Negative Interest Rates on Investment Decisions
36 Pages Posted: 20 Jun 2020
Date Written: May 20, 2020
The suggestion to implement a negative monetary policy has divided economists and politicians. The effects of this experiment on the willingness of individuals and financial intermediaries to borrow and spend money and increase their risk are controversial. To provide insight into the debate, we provide experimental evidence revealing two important results. First, zero interest rates are more efficient than negative interest rates in terms of the impact on the willingness of individuals to borrow money and take risks. We suggest two behavioral explanations for this result. Second, we find no statistical difference between the effect that positive and negative interest rates have on the change in the allocation of risky assets in investment portfolios.
Keywords: Investment Decision, Asset Allocation, Negative Interest Rate Policy, Zero Interest Rate Policy, Reaching for Yield
JEL Classification: G12, G41, E70
Suggested Citation: Suggested Citation