Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/235090 
Year of Publication: 
2020
Series/Report no.: 
KOF Working Papers No. 476
Publisher: 
ETH Zurich, KOF Swiss Economic Institute, Zurich
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 differentiated 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 banking system 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 effectively go without taking steps to make paper currency more costly.
Subjects: 
Deposits
effective lower bound
loss aversion
negative interest rates
JEL: 
D43
E43
E52
E58
G21
L13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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