Mixing QE and Interest Rate Policies at the Effective Lower Bound: Micro Evidence from the Euro Area

We study jointly expansionary rate-based monetary policy and quantitative easing, despite their concurrent implementation around the world, by exploiting the introduction of negative monetary-policy rates in a fragmented euro area, alongside cross-sectional heterogeneity in banks’ balance sheets. Banks more exposed to quantitative easing are less likely to increase credit supply when they incur higher funding costs due to a zero lower bound (ZLB) on deposit rates. Using administrative data from Germany, we also uncover that German banks rebalance their interbank lending from safe to risky countries, and that the ZLB on deposit rates compromised the effectiveness of quantitative easing.