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The impact of quantitative easing on bank loan supply and monetary policy implementation in the euro area

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  • Horst, Maximilian
  • Neyer, Ulrike

Abstract

In March 2015, the Eurosystem launched its QE-programme. The asset purchases induced a rapid and strong increase in excess reserves, implying a structural liquidity surplus in the euro area banking sector. Against this background, the first part of this paper analyses the Eurosystem's liquidity management during normal times, crisis times and times of too low in ation. With a focus on the latter, the second part of this paper develops a relatively simple theoretical model in which banks operate under a structural liquidity surplus. The model shows that increasing excess reserves have no or even a contractionary impact on bank loan supply. As the newly created excess reserves are heterogeneously distributed across euro area countries, the impact of QE on bank loan supply may differ across countries. Moreover, we derive implications for monetary policy implementation. Increases in the central bank's main refinancing rate as well as in the minimum reserve ratio and decreases in the central bank's deposit rate develop expansionary effects on loan supply - contrary to the case in which banks face a structural liquidity deficit.

Suggested Citation

  • 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).
  • Handle: RePEc:zbw:dicedp:325
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    References listed on IDEAS

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    Cited by:

    1. Horst, Maximilian & Neyer, Ulrike & Stempel, Daniel, 2020. "Asymmetric macroeconomic effects of QE-induced increases in excess reserves in a monetary union," DICE Discussion Papers 346, University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    2. Miller, Sam & Wanengkirtyo, Boromeus, 2020. "Liquidity and monetary transmission: a quasi-experimental approach," Bank of England working papers 891, Bank of England.

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    More about this item

    Keywords

    monetary policy; quantitative easing (QE); monetary policy implementation; excess liquidity; loan supply; bank lending channel;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • 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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