The Reserve Supply Channel of Unconventional Monetary Policy

60 Pages Posted: 25 Sep 2020 Last revised: 9 May 2022

See all articles by William Diamond

William Diamond

University of Pennsylvania - Finance Department

Zhengyang Jiang

Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER)

Yiming Ma

Columbia University - Columbia Business School

Date Written: September 10, 2020

Abstract

We find that central bank reserves injected by QE crowd out bank lending. We estimate a structural model with cross-sectional instrumental variables for deposit and loan demand. Our results are determined by the elasticity of loan demand and the impact of reserve holdings on the cost of supplying loans. We find that the reserves injected by QE raise loan rates by 15.6 bps, and each dollar of reserves reduces bank lending by 19 cents. Our results imply that a large injection of central bank reserves has the unintended consequence of crowding out bank loans because of bank balance sheet costs.

Keywords: Financial Intermediation, Quantitative Easing, Deposit Competition, Balance Sheet Cost, Structural Estimation

JEL Classification: G21, G28

Suggested Citation

Diamond, William and Jiang, Zhengyang and Ma, Yiming, The Reserve Supply Channel of Unconventional Monetary Policy (September 10, 2020). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3671160 or http://dx.doi.org/10.2139/ssrn.3671160

William Diamond

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Zhengyang Jiang

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://sites.google.com/site/jayzedwye/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yiming Ma (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
516
Abstract Views
1,986
rank
75,452
PlumX Metrics