The Impact of Negative Interest Rate Policies on Investments and Liquidity-constrained Households and Firms

Andrea Johnsrud Hagen & Karoline Hagerup Sæther

Student thesis: Master thesis


In this thesis, we have investigated the main concerns and hypotheses related to investments and liquidity-constrained households and firms following the Negative Interest Rate Policy (NIRP) implementation in Denmark, Sweden, Switzerland and the Euro Area. The unconventional expansionary monetary policies were implemented to meet economic challenges following the Great Financial Crisis of 2007-2008.
The main goal of the thesis is to uncover how implementation of the negative policy rates transmitted to the commercial banking market and further affected households and firms. Furthermore, we also investigate some of the consequences for the aggregate economy. The research is based on an empirical analysis of macroeconomic variables, and the approach is abductive. The data available is an incomplete set of observations, as NIRP is a relatively new, and current, economic phenomenon. Consequently, our findings and conclusions will only uncover information related to the short-term effect of NIRP implementation.
The analysis uncovered limited materialization of concerns related to NIRP implementation, and there are only a few cases where we could fully isolate a NIRP effect. This indicates that the response to NIRP implementation either is more economy-specific than general or that it, to a limited extent, differs from implementing a conventional expansionary monetary policy with low interest rates, as controlled for in this thesis.
Focusing on policy rate transmission to the commercial banking market, we concluded that transmission to a large degree had taken place following NIRP implementation. With respect to the investment analyses, we could not conclude that NIRP caused a preference shift. Moreover, we could not isolate a causality relation between NIRP implementation and corporate or aggregate investment growth. We also had to reject the hypothesis that NIRP implementation had facilitated an overinvestment bubble. In the analyses related to liquidity-constrained households and firms, we were not able to prove an increase in zombie presence on the aggregate level, or that the NIRP implementation had led to the suppression of creative destruction. We also had to reject the hypothesis that NIRP implementation would lead to an increase in labour reallocation rigidity. All in all, we did not find evidence that NIRP concerns had materialized, at least not thus far.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2017
Number of pages138