Do Conventional Monetary Policy Instruments Matter in Unconventional Times?

62 Pages Posted: 22 Apr 2019

See all articles by Manuel Buchholz

Manuel Buchholz

Halle Institute for Economic Research

Kirsten Schmidt

Halle Institute for Economic Research

Lena Tonzer

Halle Institute for Economic Research

Date Written: 2019

Abstract

This paper investigates how declines in the deposit facility rate set by the ECB affect euro area banks' incentives to hold reserves at the central bank. We find that, in the face of lower deposit rates, banks with a more interest-sensitive business model are more likely to reduce reserve holdings and allocate freed-up liquidity to loans. The result is driven by wellcapitalized banks in the non-GIIPS countries of the euro area. This reveals that conventional monetary policy instruments have limited effects in restoring monetary policy transmission during times of crisis.

Keywords: bank portfolio, central bank reserves, monetary policy

JEL Classification: E52, G11, G21

Suggested Citation

Buchholz, Manuel and Schmidt, Kirsten and Tonzer, Lena, Do Conventional Monetary Policy Instruments Matter in Unconventional Times? (2019). Deutsche Bundesbank Discussion Paper No. 27/2019. Available at SSRN: https://ssrn.com/abstract=3473022

Manuel Buchholz (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Kirsten Schmidt

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Lena Tonzer

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06018 Halle, 06108
Germany

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