Working Paper: NBER ID: w31693
Authors: William F. Diamond; Zhengyang Jiang; Yiming Ma
Abstract: We find that central bank reserves injected by QE crowd out bank lending. We estimate a structural model with cross-sectional instrumental variables for deposit and loan demand. Our results are determined by the elasticity of loan demand and the impact of reserve holdings on the cost of supplying loans. The reserves injected by QE raise loan rates by 8.2 basis points, and each dollar of reserves reduces bank lending by 8.1 cents. Our results imply that a large injection of central bank reserves has the unintended consequence of crowding out bank loans because of bank balance sheet costs.
Keywords: No keywords provided
JEL Codes: G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reserve injections (Y60) | crowd out lending predominantly to firms (G21) |
| reserve injections (Y60) | muted effect on mortgage and deposit quantities (G21) |
| central bank reserves injected through QE (E58) | bank lending (G21) |
| central bank reserves injected through QE (E58) | loan rates (E43) |
| increase in reserves (F31) | increase in marginal cost of providing loans (G21) |
| central bank reserves injected through QE (E58) | adverse lending outcomes (G21) |