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The Reserve Supply Channel of Unconventional Monetary Policy

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  • William F. Diamond
  • Zhengyang Jiang
  • Yiming Ma

Abstract

We find that central bank reserves injected by QE crowd out bank lending. We estimate a structural model with cross-sectional instrumental variables for deposit and loan demand. Our results are determined by the elasticity of loan demand and the impact of reserve holdings on the cost of supplying loans. The reserves injected by QE raise loan rates by 8.2 basis points, and each dollar of reserves reduces bank lending by 8.1 cents. Our results imply that a large injection of central bank reserves has the unintended consequence of crowding out bank loans because of bank balance sheet costs.

Suggested Citation

  • William F. Diamond & Zhengyang Jiang & Yiming Ma, 2023. "The Reserve Supply Channel of Unconventional Monetary Policy," NBER Working Papers 31693, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31693
    Note: AP CF ME
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    Cited by:

    1. Porcellacchia, Davide & Sheedy, Kevin D., 2024. "The macroeconomics of liquidity in financial intermediation," Working Paper Series 2939, European Central Bank.
    2. Li, Boyao, 2024. "A balance sheet analysis of monetary policy effects on banks," Global Finance Journal, Elsevier, vol. 61(C).

    More about this item

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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