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Liquidity provision as a monetary policy tool: The ECB’s non-standard measures after the financial crisis

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  • Quint, Dominic
  • Tristani, Oreste

Abstract

We study the macroeconomic consequences of the money market tensions associated with the financial crisis in the euro area. In a structural VAR, we identify a liquidity shock rooted in the interbank market and use its impulse response functions to calibrate key parameters of a Smets and Wouters (2003) closed-economy model augmented with a banking sector à la Gertler and Kiyotaki (2010). We highlight two main results. First, an identified liquidity shock causes a sizable and persistent fall in investment. The shock can account for one third of the observed, large fall in euro area aggregate investment in 2008–09. Second, the liquidity injected in the market by the ECB played an important role in attenuating the macroeconomic impact of the shock. According to our counterfactual simulations based on the structural model, in the absence of ECB liquidity injections interbank spreads would have been at least 200 basis points higher and their adverse impact on investment would have been more than twice as severe.

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  • Quint, Dominic & Tristani, Oreste, 2018. "Liquidity provision as a monetary policy tool: The ECB’s non-standard measures after the financial crisis," Journal of International Money and Finance, Elsevier, vol. 80(C), pages 15-34.
    • Handle: RePEc:eee:jimfin:v:80:y:2018:i:c:p:15-34
    DOI: 10.1016/j.jimonfin.2017.09.009
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    Cited by:

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    2. Melina, Giovanni & Villa, Stefania, 2023. "Drivers of large recessions and monetary policy responses," Journal of International Money and Finance, Elsevier, vol. 137(C).
    3. Koráb, Petr & Saadaoui Mallek, Ray & Dibooglu, Sel, 2021. "Effects of quantitative easing on firm performance in the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    4. Matthieu Darracq-Pariès & Niki Papadopoulou, 2020. "Balance Sheet Policies in a Large Currency Union: A Primer on ECB Non-Standard Measures since 2014," Revue d'économie politique, Dalloz, vol. 130(2), pages 171-230.
    5. Vasiliki Dimakopoulou & George Economides & Apostolis Philippopoulos, 2021. "The ECB's Policy, the Recovery Fund and the Importance of Trust: The Case of Greece," CESifo Working Paper Series 9371, CESifo.
    6. Philipp Hartman & Frank Smets, 2018. "The European Central Bank’s Monetary Policy during Its First 20 Years," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 1-146.
    7. Amara, Tijani & Mabrouki, Mohamed, 2019. "Impact de risque de crédit et de liquidité sur la stabilité bancaire [Impact of liquidity and credit risks on the bank stability]," MPRA Paper 95453, University Library of Munich, Germany.

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    More about this item

    Keywords

    ECB; Euro area; Financial crisis; Financial frictions; Interbank market; Non-standard monetary policy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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