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Asymmetric macroeconomic effects of QE-induced increases in excess reserves in a monetary union

Maximilian Horst, Ulrike Neyer and Daniel Stempel

No 346, DICE Discussion Papers from University of Düsseldorf, Düsseldorf Institute for Competition Economics (DICE)

Abstract: The Eurosystem's large-scale asset purchases (quantitative easing, QE) induce a strong and persistent increase in excess reserves in the euro area banking sector. These excess reserves are heterogeneously distributed across euro area countries. This paper develops a two-country New Keynesian model { calibrated to represent a high- and a low-liquidity euro area member { to analyze the macroeconomic effects of (QE-induced) heterogeneous increases in excess reserves and deposits in a monetary union. QE triggers economic activity and increases the union-wide consumer price level after a negative preference shock. However, its efficacy is dampened by a reverse bank lending channel that weakens the interest rate channel of QE. These dampening effects are higher in the high-liquidity country. We find similar results in response to a monetary policy shock. Furthermore, we show that a shock in the form of a deposit shift between the two countries, interpreted as capital ight, has negative (positive) effects for the economy of the country receiving (losing) the deposits.

Keywords: unconventional monetary policy; quantitative easing (QE); monetary policytransmission; excess liquidity; credit lending; heterogeneous monetary union; New Keynesianmodel (search for similar items in EconPapers)
JEL-codes: E51 E52 E58 F41 F45 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-dge, nep-eec, nep-mac, nep-mon and nep-opm
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