DP14233 Expansionary Yet Different: Credit Supply and Real Effects of Negative Interest Rate Policy

Author(s): Margherita Bottero, Camelia Minoiu, José Luis Peydró, Andrea Polo, Andrea Presbitero, Enrico Sette
Publication Date: December 2019
Date Revised: June 2020
Keyword(s): bank lending channel of monetary policy, eurozone crisis, Liquidity management, Negative Interest Rates, Portfolio rebalancing
JEL(s): E52, E58, G01, G21, G28
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14233

We show that negative interest rate policy (NIRP) has expansionary effects on bank credit supply-and the real economy-through a portfolio rebalancing channel, and that, by shifting down and flattening the yield curve, NIRP differs from rate cuts just above the zero lower bound. For identification, we exploit ECB's NIRP and matched administrative datasets-including the credit register-from Italy, severely hit by the Eurozone crisis. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets. NIRP-affected banks rebalance their portfolios from liquid assets to lending, especially to ex-ante riskier and smaller firms-without higher ex-post delinquencies-and cut loan rates (even to the same firm), inducing sizable firm-level real effects. By contrast, there is no evidence of a retail deposits channel associated with NIRP.