Whatever It Takes: The Real Effects of Unconventional Monetary Policy

Abstract

Launched in Summer 2012, the European Central Bank’s (ECB) Outright Monetary Transactions (OMT) program indirectly recapitalized European banks through its positive impact on periphery sovereign bonds. However, the stability reestablished in the banking sector did not fully translate into economic growth. We document zombie lending by banks that remained weakly capitalized even post-OMT. In turn, firms receiving loans used these funds not to undertake real economic activity, such as employment and investment, but to build cash reserves. Creditworthy firms in industries with a high zombie firm prevalence significantly suffered from this credit misallocation, which further slowed the economic recovery. Received March 21, 2018; editorial decision November 13, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Employment Effects of Unconventional Monetary Policy: Evidence from QE

“…There are also several papers that investigate the effects of unconventional monetary policy in Europe (see, e.g.,Acharya et al, 2016;Carpinelli and Crosignani, 2017;Crosignani et al, 2018;Cahn et al, 2018;Cumming, 2018).…”

Central Bank-Driven Mispricing

“…The extent of central banks' unconventional monetary policies has fostered a recent strand of literature that focuses on their unintended consequences, ranging from the effect on bond market liquidity (Pelizzon, Subrahmanyam, Tomio, and Uno, 2016;Pelizzon, Subrahmanyam, Tobe, and Uno, 2017;Schlepper, Hofer, Riordan, and Schrimpf, 2017;Christensen and Gillan, 2018), to the functioning of the repo markets (D'Amico, Fan, and Kitsul, 2015;Corradin and Maddaloni, 2017), to the QE's effect on the real economy (Acharya, Eisert, Eufinger, and Hirsch, 2017;Crosignani, Faria-e Castro, and Fonseca, 2017;Daetz, Subrahmanyam, Tang, and Wang, 2017). We contribute to this developing strand of literature by analyzing the effect of QE interventions on the actual arbitrage relationship and the mispricing between the assets the central bank is heavily purchasing and another prominent asset class.…”

Credit-Supply Shocks and Firm Productivity in Italy

“…They show that an increase in zombie lending depresses investment and employment growth of non-zombies and increases productivity dispersion. For a sample of EU countries, Acharya et al (2016b) show that the Outright Monetary Transactions program implemented by the ECB encouraged zombie lending, as banks extended new loans mainly to low-quality and unproductive firms. Those firms, in turn, used the additional funds mainly to build up cash reserves and did not invest or create new employment.…”