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Whatever it Takes: The Real Effects of Unconventional Monetary Policy

Review of Financial Studies , Vol. 32, Issue 9, pp. 3366–3411

Authors:
Viral Acharya,
Tim Eisert,
Christian Eufinger,
Christian Hirsch
Research Area:
Data Center, Financial Intermediation
Date:
Sep 2019
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.

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