Examining the Impact of Quantitative Easing on Stimulating Bank Lending in the United States During the Great Recession

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 researchattempts 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.