QE and the Bank Lending Channel in the United Kingdom

Abstract

We test whether quantitative easing (QE), in addition to boosting aggregate demand and inflation via portfolio rebalancing channels, operated through a bank lending channel (BLC) in the UK. Using Bank of England data together with an instrumental variables approach, we find no evidence of a traditional BLC associated with QE. We show, in a simple framework, that the traditional BLC is diminished if the bank receives 'flighty' deposits (deposits that are likely to quickly leave the bank). We show that QE gave rise to such flighty deposits which may explain why we find no evidence of a BLC.

Unconventional Monetary Policy, Bank Lending, and Security Holdings: The Yield-Induced Portfolio-Rebalancing Channel

“…Papers like Carpinelli and Crosignani (2017), Garcia-Posada and Marchetti (2016) or Andrade et al (2015) analyze the effect of the 3-year Longer Term Refinancing Operations (3y-LTROs) that were implemented in the Eurozone in 2011 and 2012 in the wake of the Eurozone sovereign debt crisis to prevent a funding squeeze of the banking sector. Butt et al (2014) focus on banks' deposits as the key pass-through variable of assets sales by the banks' deponents (e.g. institutional investors etc.).…”

“…There is a growing body of empirical literature that examines the liquidity-driven rebalancing motive by banks (see e.g. Kandrac and Schlusche, 2016;Butt, Churm, McMahon, Morotz, and Schanz, 2014;Carpinelli and Crosignani, 2017;Andrade, Cahn, Fraisse, and Mésonnier, 2015). However, little work has been done on a rebalancing that is priceor yield-induced.…”

Forecasting the Implications of Foreign Exchange Reserve Accumulation With an Agent-Based Model

“…However, these models only serve as theoretical foundations and play no role in the empirical analysis (e.g. Butt et al, 2014). Conventional DSGE models may in principal be used for forecasting (although we are not aware of particular examples of DSGE models' application to forecasting the effects of foreign reserve accumulation).…”

An Empirical Sectoral Model of Unconventional Monetary Policy: The Impact of QE

“…In each case the peak impact on real financial wealth peaks at 12 The M4x counterpart approach uses the banking system's balance sheet identity to express movements in M4x in terms of all the other balance sheet items on the banking system's balance sheet. To estimate the QE leakages Bridges and Thomas (2012), Cobham and Kang (2012) and Butt et al (2014) looked at the relevant M4x counterparts over the period asset purchases were made and compared them with an appropriate historical counterfactual to work out how much might be attributable to the impact of QE. pps % CHART 2.…”

“…To estimate the QE leakages Bridges and Thomas (), Cobham and Kang () and Butt et al . () looked at the relevant M4x counterparts over the period asset purchases were made and compared them with an appropriate historical counterfactual to work out how much might be attributable to the impact of QE.…”