“The Unintended Consequences of Zero Lower Bound Policy” by Marcin Kacperczyk
Marco Di Maggio
Columbia Business School
We investigate the impact of the zero lower bound interest rate policy on money market funds industry. We find that, as the Fed funds rate approaches zero bound, money funds display reaching for yield incentives in that they invest in riskier asset classes and hold less diversified portfolios. The reduction in interest rates also coincides with greater likelihood of funds exiting the market and the reduction in expenses funds charge to investors. Further, funds affiliated with large financial institutions are more likely to exit the market while funds managed by independent asset management companies take on relatively more risk-the result potentially driven by the funds' differential concerns about possible reputation losses. Additional evidence from the Fed's forward guidance policy, unexpected monetary shocks, and placebo tests corroborates our findings.