Crossing the Line: Investment Responses as ECB Rates Flip From Positive to Negative

Abstract

The deposit facility rate set by the European Central Bank turned negative for the first time in June 2014, creating debate about whether monetary transmission to the real economy alters once the zero lower bound is crossed. This thesis therefore investigates how the transmission of ECB monetary policy shocks to firm-level investment varies in two distinct interest rate regimes – conventional, positive periods, and during the unconventional, negative interest rate period. Moreover, it investigates how firm-level characteristics and industry composition shape the timing and magnitudes of investment responses to monetary policy shocks. Exploiting high-frequency surprises around ECB Governing-Council announcements and estimating local projection impulse-response functions on a panel of 976 publicly listed euro area firms for 2000-2023, the analysis uncovers marked regime-specific heterogeneity. In positive-rate periods, a tightening shock gradually suppresses investment – most for older, highly levered, high-liquid, and durable-goods firms –whereas a matching easing yields only muted, lagged recoveries led by older and large companies. Once rates turn negative, transmission flips: a tightening shock prompts an immediate, front-loaded cut-back by young, small, low-levered, high-liquid firms, and in capital-intensive sectors; the subsequent rebound, peaking several quarters later, is driven by low-levered, profitable, and liquid firms. Easing shocks below zero lift investment early in small and older firms, pause as large, levered incumbents retrench, and then surge mid-horizon among small, low-levered, and durable-goods firms. These findings establish that firm-level investment response to monetary policy shocks differ in both timing and magnitude across different interest rate regimes and diverge sharply according to firm-level characteristics and industry compositions. By providing a systematic decomposition of these asymmetries across both conventional and negative-rate regimes at the firm-level, the study advances the literature on heterogeneous effects of monetary policy and offers policy-relevant guidance for future interest rate frameworks.