DP14050 Is There a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms

Author(s):	Carlo Altavilla, Lorenzo Burlon, Mariassunta Giannetti, Sarah Holton
Publication Date:	October 2019
Date Revised:	April 2020
Keyword(s):	corporate channel, Lending Channel, monetary policy, negative rates
JEL(s):	D2, E43, E52, G21
Programme Areas:	Financial Economics, Monetary Economics and Fluctuations
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=14050

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.