Liquidity and Monetary Transmission: A Quasi-Experimental Approach

45 Pages Posted: 25 Nov 2020

Date Written: November 20, 2020


In the face of lower real interest rates, central bank balance sheets are likely to remain larger relative to pre-crisis levels, resulting in greater banking system liquidity. However, there is little evidence on the impact of higher liquidity on credit supply and the monetary transmission mechanism in the ‘new normal’. We exploit a novel dataset on bank liquidity positions arising from a unique regulatory regime and combine it with a highly-detailed, loan-level administrative dataset on UK mortgages. Using the design of quantitative easing auctions as an instrument for liquidity to address endogeneity, we find that more liquid banks charge slightly higher mortgage interest rates, and pass on significantly less changes in risk-free rates. We explain this through bank behaviour that attempts to preserve net interest margins in the face of holding low-yielding liquidity. Consistent with this, we find excess liquidity leads to reaching-for-yield responses in banks’ mortgage risk-taking. Additionally, the results shed light on the optimal mix between (un)conventional monetary policy tools. Policies that boost bank net interest margins are more likely to help the transmission of risk-free rates to lending rates.

Keywords: Bank liquidity, interest rate pass-through, monetary policy

JEL Classification: E52, E58, G21

Suggested Citation

Wanengkirtyo, Boromeus and Miller, Sam, Liquidity and Monetary Transmission: A Quasi-Experimental Approach (November 20, 2020). Bank of England Working Paper No. 891, Available at SSRN: or

Boromeus Wanengkirtyo (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Sam Miller

The Alan Turing Institute ( email )

British Library, 96 Euston Road
96 Euston Road
London, NW12DB
United Kingdom

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

Paper statistics

Abstract Views
PlumX Metrics