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Monetary policy and the flow of funds in the euro area

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  • Riccardo Bonci

    () (Bank of Italy)

Abstract

This paper provides new evidence on the transmission of monetary policy in the euro area, assessing the impact of an unexpected increase of the short-term interest rates on the lending and borrowing activity in different economic sectors. We exploit the information content of the flow-of-funds statistics, providing the best framework to analyse the flow of funds from lenders to borrowers. After estimating a small VAR for the euro area, we extend the benchmark model with the flow-of-funds series, analysing the response of these variables to a contractionary monetary policy shock. We find that the policy tightening is followed by a worsening of the budget deficit, firms cut down on their demand for bank loans, partially replacing them with inter-company loans, and draw on their liquidity to try to offset the fall in revenue associated with the slowdown in economic activity, while households increase precautionary saving in the short run. Consistent with the bank lending channel of monetary policy, the interest rate hike is followed by a short-run deceleration in credit growth, mainly driven by the response of banks.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 861.

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Date of creation: Mar 2012
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Handle: RePEc:bdi:wptemi:td_861_12

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Web page: http://www.bancaditalia.it
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Keywords: euro area; monetary policy; flow of funds; credit growth.;

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  1. Michael Ehrmann, 2004. "Firm Size and Monetary Policy Transmission – Evidence from German Business Survey Data," CESifo Working Paper Series 1201, CESifo Group Munich.
  2. Eric M. Leeper & David B. Gordon, 1991. "In search of the liquidity effect," International Finance Discussion Papers 403, Board of Governors of the Federal Reserve System (U.S.).
  3. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2010. "Business Cycles in the Euro Area," NBER Chapters, in: Europe and the Euro, pages 141-167 National Bureau of Economic Research, Inc.
  4. R. Bonci & F. Columba, 2008. "Monetary policy effects: new evidence from the Italian flow-of-funds," Applied Economics, Taylor and Francis Journals, vol. 40(21), pages 2803-2818.
  5. Isabel Marques Gameiro & João Sousa, 2010. "Monetary Policy Effects: Evidence from the Portuguese Flow of Funds," Working Papers w201014, Banco de Portugal, Economics and Research Department.
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