Whatever it Takes: The Real Effects of Unconventional Monetary Policy

In the peak of the sovereign debt crisis, the European Central Bank introduced several unconventional monetary policy measures to break the vicious circle between bank and sovereign health, with the ultimate goal to increase the supply of bank loans to the real sector and support the economic recovery of the countries in the periphery of the Eurozone. Besides the ECB’s long term refinancing operations (LTRO), and the Securities Markets Programme (SMP), it was especially the announcement of Mario Draghi in the summer of 2012 to do “whatever it takes to save the Euro” that helped to calm down markets and restore trust in the European banking sector and the sovereigns in the so called GIIPS countries (Greece, Ireland, Italy, Portugal, and Spain).

However, it is still an open question whether these non-standard measures are really able to foster the economic recovery in the periphery of the Eurozone, and if so, how the transmission channel works. It is documented in the literature that the European support measures helped to decrease bank lending rates in Europe and have probably averted an even worse situation in terms of economic growth. However, until now, the available studies are unable to clearly identify through which channels the support measures impacted the European real economy.

The project aims at investigating whether the ECB measures were able to mitigate the negative real effects of bank lending behavior during the European sovereign debt crisis that were documented by Acharya, Eisert, Eufinger, and Hirsch (2015). This paper shows that the negative real effects were indeed caused by contraction in bank loan supply as opposed to a lower demand for bank loans. Second this project investigates how the transmission channel works, that is whether effects are purely driven by a change in the macroeconomic outlook (and thus possibly a change in the demand for loans) or whether also an increase in the availability of bank financing (loan supply) contributed to the recovery in the periphery of the Eurozone, and thus also to a potential increase in investment activity and employment growth.