Essays on individual reactions to ultra-low and negative interest rates
(2022)
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- Authors
- Supervisors
- D'Hondt, Catherine
- Abstract
- Negative interest rates (NIRs) is unprecedented monetary policy that turns standard finance on its head. Since it turns standard finance at its head, the borrowers receive a reward for taking credits, and depositors have to pay for being patient and delaying their consumption. The main goal of this monetary policy is to stimulate economic growth and consumption by promoting both risk-taking and spending. Since its implementation, there is a growing body of literature studying its effectiveness. While examining its effectiveness, this literature focuses on various stakeholders touched by this monetary policy, including banks, institutional investors, and retail investors. In this thesis, we provide four experimental papers on how NIRs impact individuals’ behavior. We provide a general introduction in Chapter 1. Next, Chapter 2 investigates people’s willingness to accept NIRs by analyzing their intertemporal preferences using an online experiment. We show that people are willing to tolerate negative interest rates on their savings. We find that this tolerance strongly depends on the amount of money and time horizon. Finally, we show that it also depends on whether an individual is a regular saver or not and whether he is anchored with NIRs or positive interest rates (PIRs) first. Chapter 3 focuses on the impact of PIRs, NIRs, and procedures and costs on status quo bias in the context of savings. This status quo bias refers to the increased probability of one option being chosen when framed as status quo than when it is not framed as status quo. Using an online experiment, we find that the status quo bias is lower with NIRs than with PIRs. Next, we obtain that this status quo bias increases when one must go through procedures and pay costs to shift from the status quo to another alternative. Finally, we find that highly financially literate individuals show lower bias towards the status quo than their less financially literate counterparts. In Chapter 4, we study the impact of positive and negative nominal interest rates on money illusion for an individual’s savings and investment decisions. This money illusion occurs when individuals think in nominal rather than real terms while making decisions. We find that individuals facing negative nominal interest rates show a lower money illusion than individuals facing positive nominal interest rates. Financial literacy is linked negatively with the money illusion, i.e., individuals who are more financially literate show a lower money illusion than their less financially literate counterparts. Chapter’s 5 goal is to test whether it is the zero interest rate level or the target return that impacts the risk-taking behavior of individuals in investment decisions. We set either a low or a high target return in our experiment and demand participants to make several independent investment decisions when the risk-free rate fluctuates around the target return. For some participants, it turns out negative. We find that the prevailing reference point is the target return, whatever the risk-free rate level. Our results also suggest that the target return serves as the prevailing reference point when the risk-free rate turns out negative. Chapter 6 reports a general conclusion.
- Affiliations
Citations
Todorovic, A. (2022). Essays on individual reactions to ultra-low and negative interest rates. https://hdl.handle.net/2078.5/107921