Current Issue

Seoul Journal of Economics - Vol. 33 , No. 4

[ Article ]
Seoul Journal of Economics - Vol. 33, No. 3, pp.355-394
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2020
Received 14 Mar 2020 Revised 23 May 2020 Accepted 25 May 2020
DOI: https://doi.org/10.22904/sje.2020.33.3.005

Response of Bank Loans to the Bank of Japan’s Quantitative and Qualitative Easing Policy: A Panel Data Analysis
Etsuro Shioji
Etsuro Shioji, Professor, Department of Economics, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo, 186-8601, Japan, Tel: +81-42-5908584 (shioji@econ.hit-u.ac.jp)

Funding Information ▼

JEL Classification: E51, G21


Abstract

In recent years, many central banks around the world have conducted quantitative easing, namely a massive expansion of their balance sheets. This paper studies commercial banks’ lending behaviors under such a policy regime, using the Japanese data. Since April 2013, the Bank of Japan has executed quantitative easing of an extraordinary magnitude. This is known as the “Quantitative and Qualitative Monetary Easing (QQE)”. During this period, the overall size of bank reserves outstanding has become eight times larger in just six years. Yet aggregate data indicates that bank lending and money stock hardly responded. This seems to indicate that the traditional money creation process has totally collapsed. But is the money multiplier really completely “dead”? This paper utilizes a panel data on balance sheets of Japan’s regional banks to answer this question. The data is semiannual, consisting of observations from March and September between years 2013 and 2019. I study if a bank, which inherited a larger stock of reserves at the end of a period, would tend to expand its loans more aggressively in the subsequent period.

It turns out to be important to divide the entire QQE period into two. During the first half of our sample period, between March 2013 and September 2015, I find no significant response of bank lending to an increased bank reserves. In the second half, between March 2016 and September 2019, a significantly positive response is observed. However, even for the latter period, the coefficients on bank reserves and government bonds turn out to be about the same: this suggests that injection of bank reserves by the central bank through purchases of government bonds, which has been the most dominant form of central bank transactions under the QQE, has not been effective.


Keywords: Unconventional monetary policy, Quantitative easing, Money multiplier, Panel data, Japanese economy

Acknowledgments

Research for this paper has been funded by the Grant-in-aid for scientific research S-24223003, C-15K03418, A-17H00985 and C-18K01605, and Nomura Foundation. I would like to thank an anonymous referee for many thoughtful comments, which (I believe) have resulted in a major improvement of the paper. I would like to thank the participants at the Fall 2017 Meetings of both the Japanese Economic Association (September 9 at Aoyama Gakuin University) and the Japan Society of Monetary Economics (September 30 at Kagoshima University), especially the discussants Kiyotaka Nakashima and Hitoshi Inoue, for their valuable comments. I am also grateful to the participants at the Seoul Journal of Economics International Symposium “Macroeconomic Policies in Changing Global Economic Environment” (November 6, 2019 at Seoul National University), especially Soyoung Kim and Alessandro Rebucci, for their insightful advice and comments.


References
1. Arellano, Manuel, and Stephen Bond. “Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations.” The Review of Economic Studies 58 (No. 2 1991): 277-297.
2. Blundell, Richard, and Stephen Bond. “Initial conditions and moment restrictions in dynamic panel data models.” Journal of Econometrics 87 (No. 1 1998): 115-143. (SSN 0304-4076)
3. Bowman, D., F. Cai, S. Davies, and S. Kamin. “Quantitative easing and bank lending: Evidence from Japan.” Journal of International Money and Finance 57 (2015): 15-30.
4. Braun, R. Anton, and Etsuro Shioji. “Monetary Policy and Economic Activity in Japan, Korea, and the United States.” Seoul Journal of Economics 19 (2006): 111–146.
5. Butt, N., R. Churm, M. McMahon, A. Morotz, and J. Schanz. “QE and the Bank Lending Channel in the United Kingdom." Bank of England Working Paper 511 (2014).
6. Chakraborty, Indraneel, Itay Goldstein, and Andrew MacKinlay. “Monetary Stimulus and Bank Lending” (December 12, 2018). Finance Down Under 2017: Building on the Best from the Cellars of Finance (2018). (https://ssrn.com/abstract=2734910)
7. Eberhardt, Markus. “Estimating panel time-series models with heterogeneous slopes” Stata Journal (Stata Press, College Station, TX) 12 (No. 1 2012): 61-71.
8. Fukunaga, Ichiro, Naoya Kato, and Junko Koeda. “Maturity Structure and Supply Factors in Japanese Government Bond Markets.” Monetary and Economic Studies 33, Institute for Monetary and Economic Studies, Bank of Japan (2015): 45–96.
9. Hosono, Kaoru.“The Transmission Mechanism of Monetary Policy in Japan: Evidence from Banks’ Balance Sheets.” Journal of the Japanese and International Economies 20 (No. 3 2006): 380-405.
10. Hosono, Kaoru and Miyakawa Daisuke. “Business Cycles, Monetary Policy, and Bank Lending: Identifying the Bank Balance Sheet Channel with Firm-Bank Match-Level Loan Data.” RIETI Discussion Papers 14-E-026 (2014).
11. Inoue, Hitoshi. “Bank Lending Channel during the Quantitative Easing Policy in Japan.” (in Japanese). Sapporo Gakuin University Review of Economics (No. 6 2013): 41-58. (http://hdl.handle.net/10742/1746)
12. Joyce, Michael, and Marco Spaltro. “Quantitative Easing and Bank Lending: a Panel Data Approach.” Bank of England Working Paper 504 (2014).
13. Kandrac, John, and Bernd Schlusche. “Quantitative easing and bank risk taking: evidence from lending,” Finance and Economics Discussion Series 2017-125. Washington: Board of Governors of the Federal Reserve System (2017).
14. Koeda, Junko. “Bond Supply and Excess Bond Returns in Zero-Lower Bound and Normal Environments: Evidence from Japan.” Japanese Economic Review 68 (No. 4 2017): 443-457.
15. Luck, Stephan, and Tom Zimmermann. “Employment effects of unconventional monetary policy: Evidence from QE” Journal of Financial Economics 135 (No. 3 2020): 678-703.
16. Pesaran, M. Hashem and Smith, Ron. “Estimating long-run relationships from dynamic heterogeneous panels”. Journal of Econometrics 68 (1995): 79–113.
17. Rebucci, Alessandro. “On the Heterogeneity Bias of Pooled Estimators in Stationary VAR Specifications.” IMF Working Paper 03/73 (April 2003). (https://ssrn.com/abstract=879148)
18. Rodnyansky, Alexander, and Olivier M. Darmouni. “The effects of quantitative easing on bank lending behavior.” The Review ofFinancial Studies 30 (No. 11 2017): 3858-3887.
19. Shioji, Etsuro. “Who killed the Japanese money multiplier? A micro-data analysis of banks”. Paper presented at the Econometric Society Far Eastern Meeting (2004).
20. Shioji, Etsuro. “Time varying pass-through: will the yen depreciation help Japan hit the inflation target?” Journal of the Japanese and International Economies 37 (2015): 43-57.
21. Shioji, Etsuro. “Quantitative ‘flooding’ and bank lending: Evidence from 18 years of near-zero interest rate”, Journal of the Japanese and International Economies 52 (2019): 107-120 (ISSN 0889-1583)
22. Tachibana, Minoru, Hitoshi Inoue and Yuzo Honda. “The Effects of Quantitative Easing on Bank Lending: The Case of Japan.” (in Japanese) Keizai Bunseki (Economic Analysis) 196 (December 2017): 161-195.
23. Tischer, Johannes. “Quantitative Easing, Portfolio Rebalancing and Credit Growth: Micro Evidence from Germany.” Deutsche Bundesbank Discussion Paper 20 (2018).
24. Walsh, Carl E. “Implementing Monetary Policy.” Seoul Journal of Economics 24 (No. 4 2011): 427-470.
25. White, Halbert. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica. 48 (No. 4 1980): 817–838.