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The Impact of Quantitative Easing on Bank Loan Supply and Monetary Policy Implementation in the Euro Area

Maximilian Horst and Ulrike Neyer
From the journal Review of Economics

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 inflation. 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.

JEL Classification: E43; E51; E52; E58; G21

Acknowledgements

We thank participants at the 50th Money, Macro and Finance (MMF) Annual Conference in London 2019, the Annual Congress of the SSES in Geneva 2019, the 36th GdRE International Symposium on Money, Banking and Finance in Besançon 2019, and the Workshop on Monetary and Financial Macroeconomics in Hamburg 2019 for helpful comments and discussions that contributed to the paper. Moreover, we have benefited from discussions with seminar audiences at the Research Seminar Financial Markets and Financial Management in Düsseldorf 2018, the Inter-University Doctoral Programme in Economics (MAGKS) in Rauischholzhausen 2018, the Winter School on Applied Microeconomics: Theory and Empirics in Lenzerheide 2018 and Saas-Fee 2019, and the Inter-University Doctoral Seminar in Leipzig 2019. Any errors are our own responsibility.

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Published Online: 2020-01-08
Published in Print: 2020-01-28

© 2019 Oldenbourg Wissenschaftsverlag GmbH, Published by De Gruyter Oldenbourg, Berlin/Boston