Previously thought to be a phenomena of the past, the past two decades have
marked a triumphant return of the liquidity trap as a key monetary policy obstacle
for Central banks. Especially since the Global Financial Crisis of 2008, developed
economies across the world have been challenged by the Zero Lower Bound of
interest rates. During the crisis, Central Banks began to use unconventional
monetary policy measures in order to stimulate stagnant economies that had
already reached the Zero Lower Bound. These large scale asset purchases,
colloquially known as Quantitative Easing, attempt to provide stimulus to the
economy without applying further downward pressure to the short rate, which is
already near or at the ZLB. My research attempts to show the impact that these
asset purchases have on the lending habits of banks. The bank lending channel of
conventional monetary policy is well known, with monetary expansions
increasing bank reserves and liquidity, allowing banks to provide more loan
funding to firms and households. My research attempts to provide evidence for a
similar increase in the issuance of bank loans as a result of the Federal Reserve’s
Quantitative Easing measures beginning in November 2008. This paper finds that
Federal Reserve MBS purchases significantly increased loan activity through
portfolio rebalancing and re-establishing leverage. This suggests that by taking on
bad assets from banks, the Federal Reserve was able to stimulate loan facility
from banks and provide an injection of liquidity into the American economy in a
time of recession.