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The impact of negative interest rates on banks and firms

Summary:
I had blogged about impact of negative interest rates on pension markets. Carlo Altavilla, Lorenzo Burlon, Mariassunta Giannetti and Sarah Holton write about impact of negative interest rates (NIRP) on banks and firms: Economists and policymakers continue to question the effectiveness of monetary policy when an economy faces near-zero or sub-zero interest rates. Sceptics argue that central banks cannot stimulate lending, and may indeed decrease the loan supply, by setting negative interest rates. This column shows that negative rates do not impede the transmission of monetary policy from banks to deposit holders because firms do not withdraw cash in response to negative rates the way households might. In fact, sub-zero rates may even stimulate the economy by encouraging firms to

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I had blogged about impact of negative interest rates on pension markets.

Carlo Altavilla, Lorenzo Burlon, Mariassunta Giannetti and Sarah Holton write about impact of negative interest rates (NIRP) on banks and firms:

Economists and policymakers continue to question the effectiveness of monetary policy when an economy faces near-zero or sub-zero interest rates. Sceptics argue that central banks cannot stimulate lending, and may indeed decrease the loan supply, by setting negative interest rates. This column shows that negative rates do not impede the transmission of monetary policy from banks to deposit holders because firms do not withdraw cash in response to negative rates the way households might. In fact, sub-zero rates may even stimulate the economy by encouraging firms to invest.

In summary, not only do sound banks pass the negative rates on to corporate depositors and maintain loan supply, but the transmission mechanism is enhanced by the fact that firms with large cash-holdings more exposed to negative rates decrease their liquid asset holdings and invest more in fixed assets. 

The beneficial effects of NIRP on investment that we uncover can explain why negative rates do not appear to adversely affect bank profitability in existing studies (Altavilla et al. 2018, Lopez et al. 2018). Thus, in contrast to conventional wisdom, we find that, when banks are sound, the NIRP can provide stimulus to the real economy by influencing the behaviour of both banks and firms. 

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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