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

See all articles by Carlo Altavilla

Carlo Altavilla

European Central Bank (ECB)

Lorenzo Burlon

European Central Bank (ECB)

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Sarah Holton

Central Bank of Ireland

Multiple version iconThere are 3 versions of this paper

Date Written: October 2019

Abstract

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

Altavilla, Carlo and Burlon, Lorenzo and Giannetti, Mariassunta and Holton, Sarah, Is There a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms (October 2019). CEPR Discussion Paper No. DP14050, Available at SSRN: https://ssrn.com/abstract=3471244

Carlo Altavilla (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Lorenzo Burlon

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Mariassunta Giannetti

Stockholm School of Economics ( email )

P.O. Box 6501
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SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

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Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Sarah Holton

Central Bank of Ireland ( email )

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