Competition and the Pass-Through of Unconventional Monetary Policy : Evidence From TLTROs

We make use of an allocation rule by the ECB for Targeted Longer-Term Refinancing Operations (TLTROs) to provide causal evidence on the effect of unconventional monetary policy on the cost of loans to firms. Using transaction-level data from Italy's Central Credit Register and a difference-in-difference identification strategy, we show that treated banks decrease loan rates to the same firm by approximately 20 basis points compared with control banks. We then study how the effects of the liquidity injection vary according to the competition in the banking sector, exploiting the local nature of bank-firm lending relationships and exogenous variations in the number of pawnshops across Italian cities during the Renaissance. Our results suggest that banks' market power can significantly impair the effectiveness of unconventional monetary policy, especially for safer and smaller firms