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

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  • Altavilla, Carlo
  • Burlon, Lorenzo
  • Giannetti, Mariassunta
  • Holton, Sarah

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. JEL Classification: E52, E43, G21, D22, D25

Suggested Citation

  • Altavilla, Carlo & Burlon, Lorenzo & Giannetti, Mariassunta & Holton, Sarah, 2019. "Is there a zero lower bound? The effects of negative policy rates on banks and firms," Working Paper Series 2289, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20192289
    Note: 2279334
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    More about this item

    Keywords

    corporate channel; lending channel; monetary policy; negative rates;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D2 - Microeconomics - - Production and Organizations

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