International Finance Discussion Papers

<p>Prior to the recent financial crisis one of the most prominent examples of unconventional monetary stimulus was Japan's quantitative easing policy (QEP). Most analysts agree that QEP did not succeed in stimulating aggregate demand sufficiently to overcome persistent deflation. However it remains unclear whether QEP simply provided little stimulus or whether its positive effects were overwhelmed by the contractionary forces in Japan's post-bubble economy. In the spirit of Kashyap and Stein (2000) and Hosono (2006) this paper uses bank-level data from 2000 to 2009 to examine the effectiveness in promoting bank lending of a key element of QEP the Bank of Japan's injections of liquidity into the interbank market. We identify a robust positive and statistically significant effect of bank liquidity positions on lending suggesting that the expansion of reserves associated with QEP likely boosted the flow of credit. However the overall size of that boost was probably quite small. First the estimated response of lending to liquidity positions in our regressions is small. Second much of the effect of the BOJ's reserve injections on bank liquidity was offset as banks reduced their lending to each other. Finally the effect of liquidity on lending appears to have held only during the initial years of QEP when the banking system was at its weakest; by 2005 even before QEP was abandoned the relationship between liquidity and lending had evaporated.</p><p>This work has been selected by scholars as being culturally important and is part of the knowledge base of civilization as we know it. This work was reproduced from the original artifact and remains as true to the original work as possible. Therefore you will see the original copyright references library stamps (as most of these works have been housed in our most important libraries around the world) and other notations in the work.</p><p>This work is in the public domain in the United States of America and possibly other nations. Within the United States you may freely copy and distribute this work as no entity (individual or corporate) has a copyright on the body of the work.</p><p>As a reproduction of a historical artifact this work may contain missing or blurred pages poor pictures errant marks etc. Scholars believe and we concur that this work is important enough to be preserved reproduced and made generally available to the public. We appreciate your support of the preservation process and thank you for being an important part of keeping this knowledge alive and relevant.</p>