Mixing QE and Interest Rate Policies at the Effective Lower Bound : Micro Evidence from the Euro Area

This paper studies the distinct roles of expansionary rate-based monetary policy and quantitative easing, in spite of their concurrent implementation around the world. We exploit the introduction of negative monetary-policy rates in a fragmented euro area alongside cross-sectional heterogeneity in banks’ balance sheets to show that banks that are more exposed to central banks’ asset-purchase programs reduce their credit supply when they incur relatively higher funding costs. When banks face a zero lower bound (ZLB) on retail deposit rates, an asset swap between securities and reserves reduces banks’ net worth as the cost of holding reserves cannot be matched with a reduction in their cost of funding. Using administrative data from Germany, with deposit rates close to the ZLB, we also uncover that German banks rebalance their interbank lending from safe to risky countries, and that quantitative easing could have been more successful in increasing employment in the absence of a ZLB on deposit rates