The Impact of Quantitative Easing on Liquidity Creation

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Title: The Impact of Quantitative Easing on Liquidity Creation
Authors: Kapoor, SupriyaPeia, Oana
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Date: Apr-2020
Online since: 2020-07-23T16:02:32Z
Abstract: We study the effects of the US Federal Reserve's large-scale asset purchase programs during 2008-2014 on bank liquidity creation. Banks create liquidity when they transform the liquid reserves resulted from quantitative easing into illiquid assets. As the composition of banks' loan portfolio affects the amount of liquidity it creates, the impact of quantitative easing on liquidity creation is not a priori clear. Using a difference-in-difference identification strategy, we find that banks that were more exposed to the policy increased lending relative to a control group. However, while the increase in lending was present across all three rounds of quantitative easing, we only find a strong effect on liquidity creation during the last round. This points to a weaker impact of quantitative easing on the real economy during the first two rounds, when affected banks transformed the reserves created through the asset purchase program into less illiquid assets, such as real estate mortgages.
Type of material: Working Paper
Publisher: University College Dublin. School of Economics
Start page: 1
End page: 34
Series/Report no.: UCD Centre for Economic Research Working Paper Series; WP2020/09
Copyright (published version): 2020 the Authors
Keywords: Large-scale asset purchasesQuantitative easingLiquidity creationBank lending
metadata.dc.subject.classification: E52; E58; G21
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Economics Working Papers & Policy Papers

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