Does unconventional monetary policy boost local economic development? The case of TLTROs and Italy


EU central bank

The European sovereign debt crisis began in early 2010. It was followed by an unprecedented series of unconventional monetary policy programs implemented by the European Central Bank (ECB) to support financial institutions and governments. The policy objective was to restore the normal functioning of financial markets and ultimately stimulate economic development.

This paper specifically focuses on one of these interventions, namely the Targeted Longer-Term Refinancing Operations (TLTROs), which involved providing four-year collateralized loans to EU banks.

The TLTRO program was initiated on 5 June 2014, repeated on 10 March 2016, and again on 7 March 2019. Its goal was to inject liquidity into the banking sector under the condition that the beneficiaries would improve credit supply to households and businesses. Thus, the liquidity injection was expected to restore economic development in the Eurozone through the lending channel.

In contrast to existing literature that primarily examines the individual or cross-country effects of unconventional monetary policy, this paper takes a different approach by investigating the impact of TLTROs on regional economic development across 110 Italian provinces (territorial subdivisions). The focus is on whether this unconventional monetary policy program influenced local economic development.

Remarkably, the findings reveal an adverse effect of TLTROs on corporate investment, GDP per capita, and employment across provinces, although the economic significance of these effects is minor.

The study delves into various mechanisms to explain this surprising result.

The adverse outcomes of lower regional growth are associated with micro and small firms experiencing a decline in assets and likely facing an increased risk of business failure. Simultaneously, the findings suggest that TLTROs are linked to an increase in bank debt for low-quality borrowers (referred to as "zombie firms") but do not improve firm profitability. These findings are robust and withstand scrutiny from various tests, including propensity score matching, Heckman self-selection bias, and endogeneity analysis of branch presence.

A dataset of all Italian banks that borrowed TLTRO funds in two waves, 2014 (TLTRO-I) and 2016 (TLTRO-II), was meticulously collected to conduct the analysis. This data was then merged with bank financial statements and branch presence information from Orbis Bank Focus and the Bank of Italy. Macroeconomic data for all Italian provinces since 2011 was obtained from Eurostat and Bureau Van Dijk Orbis. The empirical strategy employed a difference-in-differences framework to analyze the presence of TLTRO banks and their correlation with indicators of local economic development.

Italy was chosen as the focus of the study for several reasons. Firstly, Italian banks were the most active participants in TLTROs, borrowing a substantial amount of funds. Secondly, many Italian banks are regionally concentrated due to past legal restrictions on intra-regional branching. Lastly, Italy was one of the core Euro countries severely impacted by the Sovereign Debt crisis.

This study makes valuable contributions to several areas of research. Firstly, it provides additional evidence on the impact of unconventional monetary policy programs, complementing previous studies that have investigated the effects of LTROs on the credit supply of European banks.

Secondly, this study contributes to the existing literature that examines the link between unconventional monetary policies and the real economy. While previous research predominantly adopted a cross-country analysis, this study focuses explicitly on TLTROs. Another notable contribution is the exploration of zombie lending. In fact, the Outright Monetary Transaction (OMT) program launched by the ECB in 2012 before TLTROs did not stimulate growth in Europe's weakest economies, as banks offered subsidized credit to distressed borrowers to prevent their foreclosure. Our findings align with this literature, as we demonstrate that lending to distressed borrowers continued, potentially negatively impacting regional growth in Italy. Our results also mirror previous studies, which find that during FED quantitative easing, banks eased credit terms for low-rated firms, which did not improve their performance and subsequently led to higher default risk and underperformance in the stock markets.

This study holds relevance for policymakers and regulators, as it examines the impact of unconventional monetary policy programs on the regional economy. Policies that may seem promising at the national level can have detrimental effects on regional or local economies due to the heterogeneity of economic development across geographical and administrative areas. Thus, this study further motivates policymakers to consider these regional nuances when formulating and implementing monetary policies.

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Authors at the Department of Management

Salvatore Perdichizzi - Junior Assistant professor 

Academic disciplines: Banking and Finance

Teaching areas: Banking and Finance

Research fields:  Finance

Salvatore Perdichizzi is an assistant professor in Economics of Financial Intermediation at the University of Bologna. His research interests cover monetary policy and empirical banking, with a focus on the effectiveness of unconventional and conventional monetary policies on economic development, financial markets, banking stability, green and sustainable finance, and bank lending conditions. He has published in leading international journals, such as the Journal of Banking & Finance, Industrial and Corporate Change, International Review of Financial Analysis, Economics Letters, and Finance Research Letters. He holds a Ph.D. in Economics (DEFAP) from the University of Milan - Bicocca and Catholic University of Sacred Heart - Milan. He is a Research Associate at the Yunus Social Business Centre of Bologna. He also served as a Research fellow at Stanford University (USA), the University of Exeter Business School (England), and the Catholic University of Sacred Heart - Milan. He was a consultant for Prometeia.


Andi Duqi - Associate Professor

Academic disciplines: Banking and Finance

Teaching areas: Banking and Finance

Research fields: Finance

Andi Duqi is an Associate Professor in Banking and Finance at the University of Bologna. From 2013 to 2018 he was appointed as an Assistant Professor of Banking and Finance at the University of Sharjah, United Arab Emirates. His research focuses mainly on banking performance, efficiency, dividend policy, competition, microfinance, and social impact finance. Andi Duqi obtained a Ph.D. in Financial Markets and Intermediaries from the University of Bologna in 2012, and he was a post-doc researcher at the same University in 2012-2013. He has been a visiting research fellow at the Bangor Business School and Nottingham Business School, United Kingdom.