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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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Keywords: euro area; monetary policy; flow of funds; credit growth.;

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  1. Eric M. Leeper & David B. Gordon, 1991. "In search of the liquidity effect," Working Paper 91-17, Federal Reserve Bank of Atlanta.
  2. Domenico Giannone & Michèle Lenza & Lucrezia Reichlin, 2008. "Business Cycles in the euro Area," Working Papers ECARES 2008_040, ULB -- Universite Libre de Bruxelles.
  3. 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.
  4. Ehrmann, M., 2000. "Firm Size and Monetary Policy Transmission - Evidence from German Business Survey Data," Economics Working Papers eco2000/12, European University Institute.
  5. R. Bonci & F. Columba, 2008. "Monetary policy effects: new evidence from the Italian flow-of-funds," Applied Economics, Taylor & Francis Journals, vol. 40(21), pages 2803-2818.
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Cited by:
  1. Philippine Cour-Thimann & Bernhard Winkler, 2012. "The ECB’s non-standard monetary policy measures: the role of institutional factors and financial structure," Oxford Review of Economic Policy, Oxford University Press, vol. 28(4), pages 765-803, WINTER.

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