Is there really a
zero-lower bound to interest rates?
Interesting new research from the European Central Bank:
“A tenet of modern
macroeconomics is that monetary policy cannot achieve much once interest rates
have already reached their zero-lower bound (ZLB). Interest rates cannot become
negative because market participants would just hoard cash instead. Thus, when short-term
interest rates approach zero, central banks cannot stimulate demand by lowering
short-term interest rates and the economy enters in a liquidity trap.
This paper
challenges this conventional wisdom by showing that banks can charge negative rates
on a significant portion of their deposits, especially if they have sound
balance sheets. A ZLB may exist for household deposits, which, being relatively
small, may be easily withdrawn and held as cash. However, corporations cannot
as easily conduct their operations without deposits. This paper shows, using
confidential balance sheet data, that relatively sounder banks in the euro area
were more likely to charge negative rates on corporate depositors after the European
Central Bank (ECB)’s Deposit Facility Rate (DFR) became negative in June 2014.”