Economics at your fingertips  

Loss Averse Depositors and Monetary Policy around Zero

Christian Stettler ()
Additional contact information
Christian Stettler: KOF Swiss Economic Institute, ETH Zurich, Switzerland

No 20-476, KOF Working papers from KOF Swiss Economic Institute, ETH Zurich

Abstract: Recent experience from Europe and Japan shows that commercial banks generally pass negative short-term policy rates on to wholesale depositors, such as insurances and pension funds. Yet, they refrain from charging negative rates to ordinary retail customers. This paper asks whether the existing evidence on the inverse relationship between market experience and the degree of loss aversion can explain this transmission pattern. To this end, I allow for loss averse depositors within a simple two-period di erentiated products duopoly with switching costs. It turns out that if depositors are especially averse to negative deposit rates, banks keep deposit rates at zero as policy rates decline, while accepting squeezed and possibly negative deposit margins. The lowest current policy rate at which the bankingsystem is willing to shield depositors from a negative deposit rate decreases with increasing i) degrees of loss aversion; ii) levels of switching costs; and iii) market expectations about the future policy rate. A calibration of the model indicates how low central banks could e ectively go without taking steps to make paper currency more costly.

Keywords: Deposits; effective lower bound; loss aversion; negative interest rates (search for similar items in EconPapers)
JEL-codes: D43 E43 E52 E58 G21 L13 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2020-04
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)
Our link check indicates that this URL is bad, the error code is: 429 Too Many Requests ( [302 Found]--> [302 Found]-->

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in KOF Working papers from KOF Swiss Economic Institute, ETH Zurich Contact information at EDIRC.
Bibliographic data for series maintained by ().

Page updated 2020-09-04
Handle: RePEc:kof:wpskof:20-476