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

• Carlo Altavilla Lorenzo Burlon Mariassunta Giannetti Sarah Holton
10 Oct 2019

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.