ESSAY

 Explain the issue of the zero-lower bound, and how different

central banks address this issue.
Nominal interest rates are not expected to fall below zero so they are said to have
a ‘Zero Lower Bound’. The traditional view of zero lower bound on nominal
interest rates has been challenged and it is said that there is a ‘Effective lower
bound’ on nominal interest rates which might be below zero. Negative interest
rates have raised concerns about the profitability of the banks and the stability of
the financial system as a whole. Central banks address this issue by using various
instruments such as forward guidance and quantitative easing. Central Banks use
this policy to manipulate interest rates either to stimulate a stagnating economy
or dampen an overheating one.

 Explain the issue of the zero-lower bound, and how different

central banks address this issue.
In the mid 2012 Denmark’s National Bank moved it monetary policy interest rates
below zero. As a result of this many non-financial Danish firms received negative
interest rates on their deposits. This had a huge impact on the non-financial firms
decisions regarding employment and real investments and also on the portfolio
behavior of the firms. This increased the risk taking among firms and also made
firms more aware of the new opportunities regarding employment and fixed
investments. Because of negative interest rates firms rebalanced their portfolios,
hired more employees than usual and shifted their deposits to other banks.

 Remark on data and methodology used, summarize the main

results.
Data from Danish Tax Agency which covers all non-financial danish firms is
used to link the firms to their bank connections. From these data it is found
that negative interest rates induce firms to increase their employment, fixed
 investment and also to rebalance their portfolio toward other liquid assets. It
is also found that firms decrease their short-term assets and increase their
fixed investments. The core data set of this paper consists of firm-level
accounting data from a private data vendor named Bisnode. Data from surveys
conducted by Statistics Denmark are also used and the sample data consists of
nearly 200,000 firm year observations over the period 2014-17. The following
event study specification is estimated 𝑦𝑖𝑡 = 𝛼𝑖 + 𝛽𝐸𝑖𝑡 + 𝛾𝑇𝑡 + 𝜃∆𝑖𝑖𝑡 + 𝛿𝑥𝑖𝑡 + 𝜀𝑖
to study the impact on firm’s portfolio and behavior.
The main results found in the paper are:
 Firms reduce their bank deposits as a share of balance sheet because of
negative interest rates.
 There is also an effect on liquidity although liquidity reacts slower than
bank deposits.
 Firms try to increase their employment and fixed assets more than other
firms and increase in employment is done faster because investments are
planned for long term.
 Firms with high liquidity react stronger to negative interest rates then firms
with low liquidity.

 What is your opinion of this (very fresh) paper? Are there other
questions you would like to get answered with the dataset
available? What issues have you identified?
My opinion is that the paper is very well written and the authors have tried to
cover all the points. I felt that the paper only analyzed the behavior and the issues
faced by the non-financial firms. The result of negative interest rate on the
financial firms is not explored in the paper.