Can Central Banks Boost Corporate Investment? Evidence from ECB Liquidity Injections.

This article examines the impact of the European Central Bank's (ECB) 3-year Longer-Term Refinancing Operations (LTROs)—a major unconventional monetary policy injecting over one trillion euros into eurozone banks during the sovereign debt crisis—on corporate investment across eurozone countries. The study finds that greater LTRO funding to banks, particularly riskier banks, is associated with a reduction in corporate investment rather than an increase, as banks often used these funds to increase holdings of risky sovereign debt instead of lending to firms. The negative investment effect is more pronounced for corporations linked to risky banks and those with higher rollover risk, and is influenced by banks' early repayment behavior and national fiscal policies; contractionary fiscal measures tended to offset the potential benefits of liquidity injections. These findings highlight the complex transmission of monetary policy through bank risk and underscore the importance of coordinated monetary, fiscal, and regulatory policies to effectively stimulate real economic activity.