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The impact of non-banking financial institutions on monetary policy transmission in Euro area

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  • Darja Milic

    (Central bank of Montenegro)

Abstract

The structure of financial intermediation has been subject to significant changes in last decades. The share of banks in the financial system is declining while non-banks are increasing, and this trend is especially evident in Euro area. The changing structure of financial intermediation has been subject of increasing attention of monetary authorities, as it may generate significant changes in the way monetary policy is transmitted to the economy. The goal of this research is to study the impact of non-banking financial institutions on monetary policy transmission in Euro area. This analysis applies a Bayesian vector autoregression model and identifies monetary policy shock in Euro area using three identification strategies—recursive identification, sign restriction and external instruments in the form of surprise changes in market rates in a short time-frame around ECB monetary policy meetings and announcements. The results show that non-banking financial institutions do not dampen transmission of monetary policy in Euro area—in response to monetary contraction they contract their balance sheets for the most part, while banks have more dampening effect or contract their assets less.

Suggested Citation

  • Darja Milic, 2021. "The impact of non-banking financial institutions on monetary policy transmission in Euro area," Empirical Economics, Springer, vol. 61(4), pages 1779-1817, October.
    • Handle: RePEc:spr:empeco:v:61:y:2021:i:4:d:10.1007_s00181-020-01927-y
    DOI: 10.1007/s00181-020-01927-y
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    More about this item

    Keywords

    Monetary policy; Euro area; Financial intermediation; VAR; Recursive identification; High-frequency instruments (HFI);
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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