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
Date Written: October 11, 2021
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
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