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Author
Date
2020-04Type
- Working Paper
ETH Bibliography
yes
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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. Show more
Permanent link
https://doi.org/10.3929/ethz-b-000409517Publication status
publishedJournal / series
KOF Working PapersVolume
Publisher
KOF Swiss Economic Institute, ETH ZurichSubject
deposits; loss aversion; negative interest rates; effective lower boundOrganisational unit
02525 - KOF Konjunkturforschungsstelle / KOF Swiss Economic Institute
03988 - Köthenbürger, Marko / Köthenbürger, Marko
06332 - KOF FB Öffentliche Finanzen / KOF Public Economics
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ETH Bibliography
yes
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