TITLE:
Liquidity Management at the Zero Lower Bound and an Era of Activism in Central Banking
AUTHORS:
Bodo Herzog
KEYWORDS:
Liquidity Management, Money Supply, Monetary Activism, Central Banking
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.6 No.1,
February
17,
2016
ABSTRACT: The paper studies liquidity management in the banking sector at the zero lower bound implemented by central banks. The new era of monetary policy with interest rates at zero and quantitative easing programs raise questions about the effectiveness of central banking policy and their impact on the banking sector. I find that the zero lower bound reduces liquidity reserves of banks and thus creates less credit supply. The T-LTRO program, developed by the European Central Bank, has helped to tackle this problem. However, the recently expanded asset purchase program reveals the opposite effect. Hence, the recent liquidity provisions by central banks have put incentives rather on de-leveraging than bank lending.