The Unintended Consequences of the Zero Lower Bound Policy

We study the impact of the zero lower bound interest rate policy on the U.S. money fund industry. We find that in response to policies that maintain zero interest rates, money funds: invest in riskier asset classes; hold less diversified portfolios; are more likely to exit the market; and reduce the fees they charge their 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 — thus inducing a negative selection of risky funds in the market. Finally, fund families closing their money funds are more likely to open new funds, especially those invested in bonds.