Research articles for the 2020-06-20
To Decrease or Not to Decrease: The Impact of Zero and Negative Interest Rates on Investment Decisions
SSRN
The suggestion to implement a negative monetary policy has divided economists and politicians. The effects of this experiment on the willingness of individuals and financial intermediaries to borrow and spend money and increase their risk are controversial. To provide insight into the debate, we provide experimental evidence revealing two important results. First, zero interest rates are more efficient than negative interest rates in terms of the impact on the willingness of individuals to borrow money and take risks. We suggest two behavioral explanations for this result. Second, we find no statistical difference between the effect that positive and negative interest rates have on the change in the allocation of risky assets in investment portfolios.
SSRN
The suggestion to implement a negative monetary policy has divided economists and politicians. The effects of this experiment on the willingness of individuals and financial intermediaries to borrow and spend money and increase their risk are controversial. To provide insight into the debate, we provide experimental evidence revealing two important results. First, zero interest rates are more efficient than negative interest rates in terms of the impact on the willingness of individuals to borrow money and take risks. We suggest two behavioral explanations for this result. Second, we find no statistical difference between the effect that positive and negative interest rates have on the change in the allocation of risky assets in investment portfolios.
Wholesale Funding, Liquidity Creation and Deposit Shortage
SSRN
Existing literature suggests that when the deposit supply is limited, access to wholesale funding allows banks to continue to create loans. However, this was not realized in the financial crisis of 2007-2009. We investigate this effect through the prism of liquidity creation, the most valuable function of banks in the economy by which they fund illiquid loans with liquid deposits. Consistent with the recent criticism of the role of unstable wholesale funding, our findings suggest that (especially short-term) wholesale funding has a negative effect on liquidity creation which is amplified rather than mitigated during times of limited deposit supply. We document a negative effect on both illiquid loans and liquid deposits which can be attributed to greater exposure to liquidity shocks.
SSRN
Existing literature suggests that when the deposit supply is limited, access to wholesale funding allows banks to continue to create loans. However, this was not realized in the financial crisis of 2007-2009. We investigate this effect through the prism of liquidity creation, the most valuable function of banks in the economy by which they fund illiquid loans with liquid deposits. Consistent with the recent criticism of the role of unstable wholesale funding, our findings suggest that (especially short-term) wholesale funding has a negative effect on liquidity creation which is amplified rather than mitigated during times of limited deposit supply. We document a negative effect on both illiquid loans and liquid deposits which can be attributed to greater exposure to liquidity shocks.
