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Quantitative easing and bank lending: Evidence from Japan

Author

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  • Bowman, David
  • Cai, Fang
  • Davies, Sally
  • Kamin, Steven

Abstract

Prior to the recent global financial crisis, one of the most prominent examples of unconventional monetary stimulus was Japan's “quantitative easing policy” (QEP). Most analysts agree that the QEP did not succeed in stimulating aggregate demand sufficiently to overcome persistent deflation. However, it remains unclear whether the QEP simply provided little stimulus, or whether its positive effects were overwhelmed by the contractionary forces in Japan's post-bubble economy. In the spirit of Kashyap and Stein (2000) and Hosono (2006), this paper uses bank-level data from 2000 to 2009 to examine the effectiveness in promoting bank lending of a key element of the QEP, the Bank of Japan's injections of liquidity into the interbank market. We identify a robust, positive, and statistically significant effect of bank liquidity positions on lending, especially for weaker banks, suggesting that the expansion of reserves associated with the QEP boosted the flow of credit. However, the overall size of that boost was probably quite small. First, the estimated response of lending to liquidity positions in our regressions is small. Second, although the BOJ's reserve injections boosted bank liquidity significantly, much of the effect was offset as banks reduced their lending to each other. Finally, the effect of liquidity on lending appears to have held only during the initial years of the QEP, when the banking system was at its weakest; by 2005, even before the QEP was abandoned, the relationship between liquidity and lending had evaporated.

Suggested Citation

  • Bowman, David & Cai, Fang & Davies, Sally & Kamin, Steven, 2015. "Quantitative easing and bank lending: Evidence from Japan," Journal of International Money and Finance, Elsevier, vol. 57(C), pages 15-30.
  • Handle: RePEc:eee:jimfin:v:57:y:2015:i:c:p:15-30
    DOI: 10.1016/j.jimonfin.2015.05.002
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Haldane, Andrew & Roberts-Sklar, Matt & Wieladek, Tomasz & Young, Chris, 2016. "QE: the story so far," CEPR Discussion Papers 11691, C.E.P.R. Discussion Papers.
    2. R.J. Galema & S. Lugo, 2017. "When central banks buy corporate bonds: : Target selection and impact of the European Corporate Sector Purchase Program," Working Papers 17-16, Utrecht School of Economics.
    3. repec:eee:ecofin:v:47:y:2019:i:c:p:308-324 is not listed on IDEAS
    4. repec:taf:oaefxx:v:4:y:2016:i:1:p:1210996 is not listed on IDEAS
    5. Horst, Maximilian & Neyer, Ulrike, 2019. "The impact of quantitative easing on bank loan supply and monetary policy implementation in the euro area," DICE Discussion Papers 325, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    6. Tischer, Johannes, 2018. "Quantitative easing, portfolio rebalancing and credit growth: Micro evidence from Germany," Discussion Papers 20/2018, Deutsche Bundesbank.
    7. Emmanuel C. Mamatzakis & Anh N. Vu, 2017. "The interplay between quantitative easing and risk: the case of the Japanese banking," Working Papers 226, Bank of Greece.
    8. repec:bla:jecsur:v:32:y:2018:i:5:p:1229-1256 is not listed on IDEAS
    9. Altavilla, Carlo & Boucinha, Miguel & Holton, Sarah & Ongena, Steven, 2018. "Credit supply and demand in unconventional times," Working Paper Series 2202, European Central Bank.

    More about this item

    Keywords

    Quantitative easing; Japan; Bank lending; Unconventional monetary policy; Central bank; Credit;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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