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The ECB and the Interbank Market

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Author Info

  • Domenico Giannone
  • Michèle Lenza
  • Huw Pill
  • Lucrezia Reichlin

Abstract

This paper analyses the impact on the macroeconomy of the ECB’s non-standard monetary policy implemented in the aftermath of the collapse of Lehman Brothers in the Fall of 2008. We study in particular the effect of the expansion of the intermediation of transactions across central bank balance sheets as dysfunctional financial markets seize up, which we regard as a key channel of transmission for non-standard monetary policy measures. Our approach is similar to Lenza et al. 2009 but we introduce the important innovation of distinguishing between private intermediation of interbank transactions in the money market and central bank intermediation of bank-to-bank transactions across the Eurosystem balance sheet. We do this by exploiting data drawn from the aggregate Monetary and Financial Institutions (MFI) balance sheet which allows us to construct a new measure of the ‘policy shock’ represented by the ECB’s increasing role as a financial intermediary. We find that bank loans to households and, in particular, to non-financial corporations are higher than would have been the case without the ECB’s intervention. In turn, the ECB’s support has a significant impact on economic activity: two and a half years after the failure of Lehman Brothers, the level of industrial production is estimated to be 2% higher, and the unemployment rate 0.6 percentage points lower, than would have been the case in the absence of the ECB’s non-standard monetary policy measures.

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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers ECARES with number ECARES 2012-005.

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Length: 24 p.
Date of creation: Jan 2012
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Handle: RePEc:eca:wpaper:2013/108100

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Keywords: non-standard monetary policy measures; interbank market;

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  1. Martha Banbura & Domenico Giannone & Lucrezia Reichlin, 2008. "Large Bayesian VARs," Working Papers ECARES 2008_033, ULB -- Universite Libre de Bruxelles.
  2. Domenico Giannone & Michèle Lenza & Giorgio E. Primiceri, 2012. "Prior Selection for Vector Autoregressions," Working Papers ECARES ECARES 2012-002, ULB -- Universite Libre de Bruxelles.
  3. Christine De Mol & Domenico Giannone & Lucrezia Reichlin, 2006. "Forecasting using a large number of predictors - Is Bayesian regression a valid alternative to principal components?," Working Paper Series 700, European Central Bank.
  4. Giannone, Domenico & Lenza, Michele & Pill, Huw & Reichlin, Lucrezia, 2010. "Non-standard Monetary Policy Measures and Monetary Developments," CEPR Discussion Papers 8125, C.E.P.R. Discussion Papers.
  5. Domenico Giannone & Michèle Lenza & Huw Pill & Lucrezia Reichlin, 2010. "Non‐Standard Monetary Policy Measures," Working Papers ECARES ECARES 2010-040, ULB -- Universite Libre de Bruxelles.
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