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Banks' supply of loans: When future monetary policy is uncertain

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  • Mitusch, Kay
  • Nautz, Dieter

Abstract

The most important policy instruments of the Bundesbank and of the coming European Central Bank involve lending to domestic credit institutions. In this monetary setup, banks use short-term central bank credits extensively in order to refinance long-term loans to the public, which makes them vulnerable to sudden monetary policy changes. We develop a loan supply model that captures distinguishing features of the European money supply process and show how money supply responds when future monetary policy is expected to become tighter or more uncertain. The results indicate that the controllability of borrowed reserves is of crucial importance for monetary policy practice. --

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Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 1998,30.

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Date of creation: 1998
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Handle: RePEc:zbw:sfb373:199830

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Keywords: Loan and money supply; central bank lending; monetary policy instruments of the ECB; interest rate risk;

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  1. Hellwig, Martin, 1994. "Liquidity provision, banking, and the allocation of interest rate risk," European Economic Review, Elsevier, vol. 38(7), pages 1363-1389, August.
  2. Baltensperger, Ernst, 1980. "Alternative approaches to the theory of the banking firm," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 1-37, January.
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