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The effectiveness of non-standard monetary policy in addressing liquidity risk during the financial crisis: The experiences of the Federal Reserve and the European Central Bank

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  • Carpenter, Seth
  • Demiralp, Selva
  • Eisenschmidt, Jens

Abstract

A number of studies sought to measure the effects of non-standard policy on bank funding markets. This paper carries those estimates a step further by looking at the effects of bank funding market stress on the volume of bank lending. By separately modeling loan supply and demand, we determine how non-standard central bank measures affected bank lending by reducing stress in bank funding markets. Our results suggest that non-standard policy measures lowered bank funding volatility in the US and the Euro Area. Lower bank funding volatility in turn increased loan supply in both regions, contributing to sustained lending activity.

Suggested Citation

  • Carpenter, Seth & Demiralp, Selva & Eisenschmidt, Jens, 2014. "The effectiveness of non-standard monetary policy in addressing liquidity risk during the financial crisis: The experiences of the Federal Reserve and the European Central Bank," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 107-129.
  • Handle: RePEc:eee:dyncon:v:43:y:2014:i:c:p:107-129
    DOI: 10.1016/j.jedc.2014.03.005
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    References listed on IDEAS

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    Cited by:

    1. Margarita Irizepova, 2015. "Methods of State’s Reaction to Risks of State Finances Management," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 129-136.
    2. Vouldis, Angelos, 2015. "Credit market disequilibrium in Greece (2003-2011) - a Bayesian approach," Working Paper Series 1805, European Central Bank.
    3. Ana Sofia Saldanha & Carla Soares, 2015. "The Portuguese money market throughout the crisis: What was the impact of ECB liquidity provision?," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    4. Beck, Thorsten & Colciago, Andrea & Pfajfar, Damjan, 2014. "The role of financial intermediaries in monetary policy transmission," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 1-11.
    5. Margarita Irizepova, 2015. "Historical Evolution of Economic Category “State Financial Reserves”," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 103-114.
    6. Dubecq, Simon & Monfort, Alain & Renne, Jean-Paul & Roussellet, Guillaume, 2016. "Credit and liquidity in interbank rates: A quadratic approach," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 29-46.
    7. Stefan Behrendt, 2016. "Determinants of lending activity in the Euro area," Jena Economic Research Papers 2016-017, Friedrich-Schiller-University Jena.

    More about this item

    Keywords

    Bank lending; Non-standard policy; Bank funding volatility;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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