Is there a zero lower bound? The effects of negative policy rates on banks and firms

Carlo Altavilla,Lorenzo Burlon,Mariassunta Giannetti,Sarah Holton

doi:10.1016/j.jfineco.2021.06.032

Abstract

Exploiting confidential data from the euro area, we show that sound banks pass negative rates on to their corporate depositors and that pass-through is not impaired when policy rates move into negative territory. We do not observe a contraction in deposits, reflecting a general increase in corporate liquidity during the sample period. When their banks charge negative rates on deposits, firms with ex ante high liquidity invest more than comparable firms that are not charged negative rates and increase their liquid holdings less. These results challenge the common view that conventional monetary policy becomes ineffective at the zero lower bound.

Highlights

A tenet of modern macroeconomics is that monetary policy cannot achieve much with standard interest rate policies once rates have already reached the so-called zero lower bound (ZLB)
We show that sound banks are more inclined to charge negative rates once the European Central Bank (ECB) policy rates turn negative
A ZLB may exist for household deposits, which, being relatively small, may be withdrawn and held as cash. Corporations cannot conduct their operations without deposits as. Consistent with this observation, this paper shows, using confidential data, that sound banks in the euro area started to charge negative rates on corporate depositors after the European Central Bank (ECB)’s Deposit Facility Rate (DFR) became negative in June 2014

Summary

Introduction

A tenet of modern macroeconomics is that monetary policy cannot achieve much with standard interest rate policies once rates have already reached the so-called zero lower bound (ZLB) (see, e.g., Keynes, 1936; Krugman, 1998; Eggertsson and Woodford, 2003; Christiano, Eichenbaum, and Rebelo, 2011; Correia, Farhi, Nicolini, and Teles, 2013). In column 6, it appears that banks with low non-performing loans did not lend more in the two years preceding the NIRP, suggesting that they do not experience high growth in demand and that rather they increase the supply of credit as a reaction to the policy.

Results

Conclusion