much of the observed fall. this effect, paired with the credit impulse provided by the tltros, has also helped boost competition among banks and put further downward pressure on lending rates. evidence from the bls confirms that rising competitive pressures have been a key contributor to margin compressions over the last two years. purchases of corporate bonds are also a factor : banks facing substitution of bank loans by corporate bonds have reported higher competitive pressures and stronger margin compressions on loans to large firms. there is some evidence, too, that as prices have risen banks have rebalanced their portfolios away from sovereign bonds and towards loans. the increase in bank credit to the private sector has been counterbalanced by a decrease in credit to general government. banks responding to the bls last year indicated that they used the additional liquidity from app - related sales for granting loans, potentially responding to the incentives created by our asset purchases and negative interest rate policy. ecb staff research finds that banks ’ reactions to holdings of excess liquidity have changed due to the charge on the deposit facility : cumulated bank lending in less vulnerable countries has been one percentage point higher than it would have been otherwise. as borrowing conditions for the real economy have loosened, economic activity has followed. whereas the 2010 – 11 recovery was based almost exclusively on net exports, the euro area is now experiencing a recovery based predominantly on domestic demand. in fact, growth in the euro area was previously closely correlated with the strength of international trade, but that 5 / 8 bis central bankers'speeches relationship has weakened recently. monetary policy is contributing to higher domestic absorption through all three classical channels. the strong recovery in consumption has been bolstered through the income channel, since falling interest rates have supported net borrowers, who tend to be liquidity - restrained and have a higher marginal propensity to consume. expansionary effects are also visible through t h e intertemporal substitution channel : in particular, easier borrowing conditions have encouraged households to bring forward durable consumption, and firms ’ investment, through credit. consumption of durables has rebounded in recent years and its growth, especially in countries where credit was previously very tight, is closely correlated with the improvement in credit conditions as recorded in the bls. investment has responded more slowly to low interest rates, yet monetary policy is helping create the conditions for a stronger investment revival through its overall effect on the economy, sometimes called the “ accelerator effect ”. production and selling price expectations are rising as aggregate demand picks

to the bank lending survey ( bls ). this funding improvement can in turn be seen in bank lending conditions : analysis of the bidding of banks in tltros shows that there has been a close relationship between participation in these operations and lending behaviour, especially in vulnerable countries. we find that banks located in vulnerable countries that have participated in tltros have lowered their lending rates by more than non - participants. this has resulted both from the lower financing costs elicited by the tltro, which has created scope for banks to reduce lending rates, and the increased lender competition for good credit it has spurred. these patterns are again confirmed by the responses to the bls 9. micro evidence confirms that the negative dfr has empowered the app, too. 10 ecb staff research finds that bank balance sheet reactions to holdings of excess liquidity have changed as a result of this policy : for example, banks in less vulnerable euro area countries were found to have granted more loans to the real economy than would have been the case without negative rates. in addition, banks with large holdings of excess liquidity, in particular in less - vulnerable member states, were found to have rebalanced significantly more towards non - domestic euro area government bonds than absent the negative dfr. this behaviour is likely to have contributed to the fall a reduction in fragmentation and a more uniform transmission of monetary policy, in the past year or so. in sum, relative to the counterfactual scenario, our policy package has had a tangible improvement in financial and borrowing conditions. impact on output and inflation this improvement is a sign that our measures have cleared important hurdles on their way to supporting the macroeconomy. what we have not seen yet, however, is a significant recovery in the path of either headline or core inflation. this has led some observers to altavilla c., g. carboni, r. motto ( 2015 ), “ asset purchase programmes and financial markets : lessons from the euro area ”, ecb working paper no. 1864. these estimates are based on a counterfactual simulation of lending rates using a panel bvar of euro area banks and the long - run effect of lower government bond yields on nfc lending rates using a panel - error correction model, also estimated at bank level. ecb ( 2015 ), “ the transmission of the ecb ’ s recent non - standard monetary policy measures ”, economic bulletin, issue 7 / 2015. s. demiralp, j