Excess Reserves and Monetary Policy Tightening

Abstract

We show that the transmission of a tightening monetary policy is affected when central bank reserves are abundant. Specifically, the net worth of reserve-rich banks may display a boost when the interest rate paid on reserves increases strongly. Focusing on the European Central Bank's 2022 rate hiking cycle, we show that reserve-rich banks' credit supply is less sensitive to the monetary policy tightening compared to other banks. The effect varies in the cross-section of both banks and firms. The results are binding at the firm level, indicating the presence of real effects.

Keywords: Interest rates, bank lending, excess liquidity, AnaCredit

JEL Classification: E43, E44, E52, G21