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

Carlo Altavilla (), Lorenzo Burlon (), Mariassunta Giannetti and Sarah Holton

No 2289, Working Paper Series from European Central Bank

Abstract: Exploiting confidential data from the euro area, we show that sound banks can pass negative rates on to their corporate depositors without experiencing a contraction in funding. These pass-through effects become stronger as policy rates move deeper into negative territory. Banks offering negative rates provide more credit than other banks suggesting that the transmission mechanism of monetary policy is not hampered. The negative interest rate policy (NIRP) provides further stimulus to the economy through firms’ asset rebalancing. Firms with high current assets linked to banks offering negative rates appear to increase their investment in tangible and intangible assets and to decrease their cash holdings to avoid the costs associated with negative rates. Overall, our results challenge the commonly held view that conventional monetary policy becomes ineffective when policy rates reach the zero lower bound. JEL Classification: E52, E43, G21, D22, D25

Keywords: corporate channel; lending channel; monetary policy; negative rates (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
Date: 2019-06
Note: 2279334
References: View references in EconPapers View complete reference list from CitEc
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Handle: RePEc:ecb:ecbwps:20192289