How low for how long? From a monetary policy perspective

Mamatzakis, Emmanuel and Staikouras, C. and Triantopoulos, C. (2022) How low for how long? From a monetary policy perspective. Working Paper. Birkbeck, University of London, London, UK. (Unpublished)

Abstract

This paper examines the impact of euro-area quantitative easing on the banking industry. We provide a dynamic threshold panel model that endogenously identifies the low threshold of the monetary policy rate. And we also provide insights into the long vs the short-run impact of quantitative easing on bank-level resilience and competition. Results show that there is a negative relationship between low rates and bank risk.. For the low levels of main refinancing operation, which is below 0.1097%, quantitative easing would reduce bank resilience, whereas for higher thresholds it will increase bank resilience. We also report the long-run impact of UMP on bank risk, as well as the short-run dynamics using a panel VAR model. This paper provides empirical estimates of low thresholds for the ECB’s rate and responses to shocks in monetary policy. The main findings of our analysis show that asymmetry is present because in a low regime we observe that an increase in MRO would decrease Z-score, increasing bank risk and reducing bank stability. Policy implications are of interest in the current conjecture that there are voices for hikes in the interest rates despite the anemic euro-area recovery and the geopolitical tensions.

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