A world of negative nominal interest rates is new and uncharted territory, raising questions about the impact on the real economy, the banking system, and financial stability (Eggertsson et al. 2018, Eggertsson and Summers 2019, Andersson and Jonung 2020, Bats et al. 2020, Lilley and Rogoff 2020, Repullo 2020). One of the key issues is the extent to which the lowering of monetary policy interest rates into negative territory has stimulated the economy.
Denmark was the first country in the world in which the key monetary policy interest rate became negative (Krogstrup et al. 2020). As a result, many Danish non-financial firms have faced negative interest rates on their bank deposits for several years. Denmark has high-quality microdata in administrative and statistical registers and offers ample opportunities to link granular information from the various registers at a firm level. This makes Denmark an interesting case to consider when it comes to tracing the effects of negative interest rates on the real economy.
This column presents the main findings of our new study (Abildgren and Kuchler 2020), which is based on comprehensive Danish microdata covering 45,000 firms over the 2014–2018 period. We compare the behaviour of firms that have been charged negative interest rates on bank deposits with the behaviour of similar firms that have not (yet) been charged negative interest rates on their bank deposits. The comparison takes changes in interest rates into account, so the results do not reflect the response to the interest rate change associated with interest rates falling below zero. In other words, our study provides an estimate of the pure change in corporate behaviour from crossing the zero interest rate threshold.
Change banks, deleverage, invest more and hire more employees
We find a clear tendency for firms to change behaviour when faced with negative interest rates on their bank deposits. Negative rates prompt them to deleverage and turn to other financial assets. They also become more inclined to change banks (Figure 1).
Figure 1 When charged negative deposit rates, firms are more inclined to form new banking relationships
Notes: Share of firms shifting deposits to a new bank in a given year. Firms are placed in the blue group when at least one of their existing banks had introduced negative deposit rates in the previous year. Source: Abildgren and Kuchler (2020).
Our study also shows that negative deposit rates prompt firms to increase their investment in fixed capital (machinery, buildings, commercial vehicles, etc.) and employment compared with firms that are not charged negative interest rates (Figure 2). Two years after being charged negative interest rates on its bank deposits, the average firm has increased its number of employees by about three percentage points more than a similar firm that has not faced negative deposit rates. And the firm’s investment ratio is about 0.5 percentage points higher. In a recent study, Altavilla et al. (2019) also found that euro area firms with high cash holdings increase their investment when faced with negative deposit rates.
Figure 2 Negative deposit rates lead to higher corporate employment and investment
Notes: The figure shows the impact of the introduction of negative deposit rates on corporate employment and investment ratios. The estimation is based on a comparison between firms whose banks introduced negative deposit rates at time 0 and other firms. Employment is measured as full-time equivalents, and the investment ratio is calculated as net investment to value added. Source: Abildgren and Kuchler (2020).
When faced with negative deposit rates, younger firms, in particular, tend to increase employment, while older firms tend to increase investment (Figure 3). The high percentage increase in employment for younger firms should be seen in the context that they are often small and in a growth phase. Rather than depositing current earnings into their bank accounts at negative interest rates, they seem to be inclined to increase employment slightly more than they would otherwise have done. The Danish labour market is normally considered to be very flexible due to a ‘flexicurity model’ that combines flexible hiring and firing rules with a generous social safety net and active labour-market policies. Younger firms might therefore perceive increased employment to be less irreversible than fixed investment. Older and more established firms tend to be more capital intensive than younger ones and can increase their investment more rapidly.
Figure 3 Younger firms increase employment while older firms increase investment
Notes: See the note for Figure 2. Younger firms are firms less than 10 years old, whereas older firms are firms that are at least 10 years old. Source: Abildgren and Kuchler (2020).
What drives the change in corporate behaviour?
A possible explanation for the corporate response to negative deposit rates could be that firms become more aware of their economic situation and financial position when having to pay banks for holding their deposits. This could, for instance, make them consider whether they have excess liquidity and would benefit from deleveraging. Or they may consider alternative investment options such as investing in new production equipment or taking on more employees. Firms with large bank deposits are normally approached by their banks when the banks introduce negative deposit rates, and this may induce them to consider their alternatives.
Negative deposit rates may also increase the risk appetite of firms, making them gravitate towards investment in production and jobs with a potentially higher (and positive) return than bank deposits – but also subject to greater risk.
Moreover, negative deposit rates could fundamentally impact firms’ perception of the future. For instance, because negative deposit rates send a very direct signal to the affected firms regarding the general accommodative monetary conditions that stimulate the economy and induce the firm’s customers to increase demand. Or it could be seen as a signal heralding a protracted period of low interest rates, resulting in low financing costs for the firm.
We find that service operators faced with negative interest rates have a less pessimistic perception of the future than other service operators. The probability of a service operator expecting sales and employment to decline falls by about 10 percentage points during the first six months after the service operator has been faced with a negative deposit rate (Figure 4).
Figure 4 Service operators become less pessimistic when charged negative deposit rates
Notes: The figure shows the change in probability of a firm expecting a decrease in turnover and employment from the month before the introduction of negative deposit rates by one of the firm’s banks until six months after the introduction. Only firms included in Statistics Denmark’s tendency survey for the services sector are included in the calculations. The calculations take into account general changes in firms’ expectations due to factors such as macroeconomic shocks and seasonal fluctuations. Source: Abildgren and Kuchler (2020).
Our study shows that firms exposed to negative deposit rates to a higher degree than other firms increase their fixed investments and employment – after due control for changes in the level of interest rates. These findings are suggestive of an additional monetary transmission channel that operates as nominal interest rates cross zero and become negative. The transmission channel might imply that firms become more aware of their portfolio composition and alternative opportunities when deposit rates cross zero and become negative.
Authors’ note: Views and conclusions expressed in this column are those of the authors and do not necessarily represent those of Danmarks Nationalbank.
Abildgren, K, and A Kuchler (2020), “Do firms behave differently when nominal interest rates are below zero?”, Danmarks Nationalbank Working Paper 164.
Altavilla, C, L Burlon, M Giannetti and S Holton (2019), “The impact of negative interest rates on banks and firms”, VoxEU.org, 8 November.
Andersson, F N G, and L Jonung (2020), “Don’t do it again! The Swedish experience with negative central bank rates in 2015-2019”, VoxEU.org, 8 May.
Bats, J, M Giuliodori and A Houben (2020), “Monetary policy effects in times of negative interest rates”, VoxEU.org, 17 November.
Eggertsson, G, R Juelsrud and E Getz Wold (2018), “Monetary policy with negative nominal interest rates”, VoxEU.org, 31 January.
Eggertsson, Gauti, and Lawrence H Summers (2019), “Negative interest rate policy and the bank lending channel”, VoxEU.org, 24 January.
Krogstrup, S, A Kuchler and M Spange (2020), “Negative interest rates: The Danish experience”, VoxEU.org, 2 October.
Lilley, A, and K Rogoff (2020), “Negative interest rate policy in the post COVID-19 world”, VoxEU.org, 17 April.
Repullo, R (2020), “The reversal interest rate: A critical review”, VoxEU.org, 4 November.