QE and the Bank Lending Channel in the United Kingdom

45 Pages Posted: 21 Sep 2014

See all articles by Nicholas Butt

Nicholas Butt

Bank of England

Rohan Churm

Bank of England - Monetary Analysis

Michael F. McMahon

University of Warwick - Faculty of Social Studies; London School of Economics & Political Science (LSE)

Arpad Morotz

Bank of England

Jochen F. Schanz

Bank for International Settlements (BIS)

Multiple version iconThere are 3 versions of this paper

Date Written: September 19, 2014

Abstract

We test whether quantitative easing (QE) provided a boost to bank lending in the United Kingdom, in addition to the effects on asset prices, demand and inflation focused on in most other studies. Using a data set available to researchers at the Bank, we use two alternative approaches to identify the effects of variation in deposits on individual banks' balance sheets and test whether this variation in deposits boosted lending. We find no evidence to suggest that QE operated via a traditional bank lending channel (BLC) in the spirit of the model due to Kashyap and Stein. We show in a simple BLC framework that if QE gives rise to deposits that are likely to be short-lived in a given bank (‘flighty’ deposits), then the traditional BLC is diminished. Our analysis suggests that QE operating through a portfolio rebalancing channel gave rise to such flighty deposits and that this is a potential reason that we find no evidence of a BLC. Our evidence is consistent with other studies which suggest that QE boosted aggregate demand and inflation via portfolio rebalancing channels.

Keywords: Monetary policy, bank lending channel, quantitative easing

JEL Classification: E51, E52, G20

Suggested Citation

Butt, Nicholas and Churm, Rohan and McMahon, Michael F. and Morotz, Arpad and Schanz, Jochen F., QE and the Bank Lending Channel in the United Kingdom (September 19, 2014). Bank of England Working Paper No. 511, Available at SSRN: https://ssrn.com/abstract=2498562 or http://dx.doi.org/10.2139/ssrn.2498562

Nicholas Butt (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Rohan Churm

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Michael F. McMahon

University of Warwick - Faculty of Social Studies ( email )

United Kingdom

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Arpad Morotz

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Jochen F. Schanz

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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