Did ECB Liquidity Injections Help the Real Economy?

Abstract

Can monetary stimulus by central banks boost corporate investment? We answer this question by studying ECB's Longer-Term Refinancing Operations (LTROs), which provided cheap funding to Eurozone commercial banks to support the real sector. We find that, contrary to the intended result, firms reduced investment after their banks took LTRO funds from the ECB. The investment reduction is concentrated in firms with risky lenders, suggesting that borrowers' concerns about lender risk encouraged them to curb investment. The banks' LTRO uptakes were endogenously chosen: riskier banks took more funds from the LTROs. But, LTRO funds were mostly used to rollover existing loans. However, firms that obtained new loans from banks that availed of LTRO funds increased investment. Overall, our results highlight the challenges of boosting corporate investment through central bank injection of liquidity into the banking system, especially when bank balance sheets are impaired.