The Impact of Quantitative Easing on Liquidity Creation

34 Pages Posted: 26 May 2020

See all articles by Supriya Kapoor

Supriya Kapoor

Technological University Dublin

Oana Peia

University College Dublin (UCD)

Date Written: April 28, 2020


We study the effects of the US Federal Reserve’s large-scale asset purchase programs during 2008-2014 on bank liquidity creation. Banks create liquidity when they transform the liquid reserves resulted from quantitative easing into illiquid assets. As the composition of banks’ loan portfolio affects the amount of liquidity it creates, the impact of quantitative easing on liquidity creation is not a priori clear. Using a difference-in-difference identification strategy, we find that banks that were more exposed to the policy increased lending relative to a control group. However, while the increase in lending was present across all three rounds of quantitative easing, we only find a strong effect on liquidity creation during the last round. This suggests, that during the first two rounds, affected banks transformed the reserves created through the asset purchase program into less illiquid assets, such as real estate mortgages, pointing to a weaker impact of the policy on the real economy.

Keywords: Large-Scale Asset Purchases, Quantitative Easing, Liquidity Creation, Bank Lending

JEL Classification: E52, E58, G21

Suggested Citation

Kapoor, Supriya and Peia, Oana, The Impact of Quantitative Easing on Liquidity Creation (April 28, 2020). Available at SSRN: or

Supriya Kapoor (Contact Author)

Technological University Dublin ( email )

School of Languages, Law & Social Scirnces
City-Centre Campus, Grangegorman

Oana Peia

University College Dublin (UCD) ( email )

Belfield, Dublin 4 4

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