Expansionary Yet Different: Credit Supply and Real Effects of Negative Interest Rate Policy

Authors: Margherita Bottero, Camelia Minoiu, José-Luis Peydró, Andrea Polo, Andrea F. Presbitero and Enrico Sette

Journal of Financial Economics, Vol. 146, No 2, 754-778, November, 2022

We show that negative interest rate policy (NIRP) has expansionary effects on credit supply through a portfolio rebalancing channel. By shifting down and flattening the yield curve, NIRP differs from rate cuts just above the zero-lower-bound and has effects similar to QE. For identification, we exploit ECB’s NIRP and the Italian credit register and, for external validity, European and U.S. datasets. NIRP affects more banks with higher ex-ante liquid assets, including net interbank positions. More exposed banks reduce liquid assets, expand credit supply, especially to financially-constrained firms, and cut loan rates, inducing firms to increase investment and the wage bill.

This paper originally appeared as Barcelona School of Economics Working Paper 1090