Quantitative Easing and Bank Lending: Evidence from Japan

Posted: 23 Jul 2011

See all articles by David Bowman

David Bowman

Board of Governors of the Federal Reserve

Fang Cai

Federal Reserve Board

Sally M. Davies

Government of the United States of America - International Banking Section

Steven B. Kamin

Board of Governors of the Federal Reserve System

Date Written: June 13, 2011

Abstract

Prior to the recent financial crisis, one of the most prominent examples of unconventional monetary stimulus was Japan's "quantitative easing policy" (QEP). Most analysts agree that QEP did not succeed in stimulating aggregate demand sufficiently to overcome persistent deflation. However, it remains unclear whether 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 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, suggesting that the expansion of reserves associated with QEP likely 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, much of the effect of the BOJ's reserve injections on bank liquidity 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 QEP, when the banking system was at its weakest; by 2005, even before QEP was abandoned, the relationship between liquidity and lending had evaporated.

Keywords: Quantitative Easing, Japan, Bank Lending, Unconventional Monetary Policy, Central Bank, Credit

JEL Classification: E44, E52, E58, G21

Suggested Citation

Bowman, David H. and Cai, Fang and Davies, Sally M. and Kamin, Steven B., Quantitative Easing and Bank Lending: Evidence from Japan (June 13, 2011). FRB International Finance Discussion Paper No. 1018. Available at SSRN: https://ssrn.com/abstract=1893068 or http://dx.doi.org/10.2139/ssrn.1893068

David H. Bowman (Contact Author)

Board of Governors of the Federal Reserve ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-2334 (Phone)
202-736-5638 (Fax)

Fang Cai

Federal Reserve Board ( email )

Office of Financial Stability Policy and Research
1801 K St NW
Washington, DC 20551
United States
202-452-3540 (Phone)
202-263-4850 (Fax)

Sally M. Davies

Government of the United States of America - International Banking Section ( email )

20th & C Streets NW
Washington, DC 20551
United States
202-452-2908 (Phone)
202-452-6424 (Fax)

Steven B. Kamin

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States
202-452-3339 (Phone)
202-736-5638 (Fax)

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