Mixing QE and Interest Rate Policies at the Effective Lower Bound: Micro Evidence from the Euro Area

65 Pages Posted: 12 Oct 2021 Last revised: 29 Jun 2022

See all articles by Christian Bittner

Christian Bittner

Deutsche Bundesbank

Alexander Rodnyansky

University of Cambridge - Faculty of Economics; Centre for Economic Policy Research (CEPR)

Farzad Saidi

University of Bonn; Centre for Economic Policy Research (CEPR)

Yannick Timmer

International Monetary Fund (IMF) - Research Department; Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: October 11, 2021

Abstract

This paper studies jointly the roles of expansionary rate-based monetary policy and quantitative easing, in spite of their concurrent implementation around the world. We exploit the introduction of negative monetary-policy rates in a fragmented euro area, alongside cross-sectional heterogeneity in banks' balance sheets, to show that banks that are more exposed to asset-purchase programs reduce their credit supply relatively more when they incur higher funding costs. Given a zero lower bound (ZLB) on retail deposit rates, an asset swap between securities and reserves reduces banks' net worth as the cost of holding reserves cannot be matched with a reduction in their cost of funding. Using administrative data from Germany, with deposit rates close to the ZLB, we also uncover that German banks rebalance their interbank lending from safe to risky countries, and that quantitative easing would have been more successful in increasing employment in the absence of a ZLB on deposit rates.

Keywords: Negative Interest Rates, Quantitative Easing, Unconventional Monetary Policy, Bank Lending Channel

JEL Classification: E52, E58, G21

Suggested Citation

Bittner, Christian and Rodnyansky, Alexander and Saidi, Farzad and Timmer, Yannick, Mixing QE and Interest Rate Policies at the Effective Lower Bound: Micro Evidence from the Euro Area (October 11, 2021). Available at SSRN: https://ssrn.com/abstract=3940655 or http://dx.doi.org/10.2139/ssrn.3940655

Christian Bittner

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Alexander Rodnyansky (Contact Author)

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

HOME PAGE: http://www.arodnyansky.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Farzad Saidi

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Yannick Timmer

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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

Paper statistics

Downloads
111
Abstract Views
451
rank
304,549
PlumX Metrics