The impact of quantitative easing on liquidity creation

Mardi | 2019-07-09
Salle des thèses 16h – 17h20

Supriya KAPOOR

We study the effects of the US Federal Reserve’s large-scale asset purchase programs 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 the different rounds 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 large scale asset purchases have indeed created more liquidity in the banking sector. These effects, however, are only present for the third round of quantitative easing, when the Fed largely purchased mortgage-backed securities, and less so for the other rounds.