The Impact of Quantitative Easing on Liquidity Creation

Supriya Kapoor and Oana Peia

No 202009, Working Papers from School of Economics, University College Dublin

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.

Keywords: Large-scale asset purchases; Quantitative easing; Liquidity creation; Bank lending (search for similar items in EconPapers)
JEL-codes: E52 E58 G21 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2020-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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http://hdl.handle.net/10197/11435 First version, 2020 (application/pdf)

Related works:
Journal Article: The impact of quantitative easing on liquidity creation (2021)
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