Can the excess of liquidity affect the effectiveness of the european monetary policy?

Abstract

The abundance of liquidity in the euro area observed during the 1990s forced the European central banks to relax their monetary policy. The demand of bank corporate lending, however, has slowed down, suggesting that monetary policy has not been effective in this area. Firms decided to hold liquid assets in order to: i) protect themselves against a future scenario of growing interest rates, lower earnings and higher restrictions and costs of accessing capital markets; and ii) allow them to invest in attractive investment projects in the event of a tightening of monetary conditions. These hypotheses are shown to be valid according to the empirical results shown in this paper from a sample of Spanish firms during 1992-2000. (118 words)