Monetary policy and the flow of funds in the euro area
This paper provides new evidence on the transmission of monetary policy in the euro area, assessing the impact of an unexpected increase of the short-term interest rates on the lending and borrowing activity in different economic sectors. We exploit the information content of the flow-of-funds statistics, providing the best framework to analyse the flow of funds from lenders to borrowers. After estimating a small VAR for the euro area, we extend the benchmark model with the flow-of-funds series, analysing the response of these variables to a contractionary monetary policy shock. We find that the policy tightening is followed by a worsening of the budget deficit, firms cut down on their demand for bank loans, partially replacing them with inter-company loans, and draw on their liquidity to try to offset the fall in revenue associated with the slowdown in economic activity, while households increase precautionary saving in the short run. Consistent with the bank lending channel of monetary policy, the interest rate hike is followed by a short-run deceleration in credit growth, mainly driven by the response of banks.
|Date of creation:||Mar 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.bancaditalia.it
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Domenico Giannone & Michèle Lenza & Lucrezia Reichlin, 2008.
"Business Cycles in the euro Area,"
Working Papers ECARES
2008_040, ULB -- Universite Libre de Bruxelles.
- Giannone, Domenico & Lenza, Michele & Reichlin, Lucrezia, 2009. "Business Cycles in the Euro Area," CEPR Discussion Papers 7124, C.E.P.R. Discussion Papers.
- Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2008. "Business Cycles in the Euro Area," NBER Working Papers 14529, National Bureau of Economic Research, Inc.
- Eric M. Leeper & David B. Gordon, 1991.
"In search of the liquidity effect,"
International Finance Discussion Papers
403, Board of Governors of the Federal Reserve System (U.S.).
- Michael Ehrmann, 2004.
"Firm Size and Monetary Policy Transmission – Evidence from German Business Survey Data,"
CESifo Working Paper Series
1201, CESifo Group Munich.
- Ehrmann, M., 2000. "Firm Size and Monetary Policy Transmission - Evidence from German Business Survey Data," Economics Working Papers eco2000/12, European University Institute.
- Ehrmann, Michael, 2000. "Firm size and monetary policy transmission: evidence from German business survey data," Working Paper Series 0021, European Central Bank.
- Riccardo Bonci & Francesco Columba, 2008.
"Monetary Policy Effects: New Evidence from the Italian Flow of Funds,"
Temi di discussione (Economic working papers)
678, Bank of Italy, Economic Research and International Relations Area.
- R. Bonci & F. Columba, 2008. "Monetary policy effects: new evidence from the Italian flow-of-funds," Applied Economics, Taylor & Francis Journals, vol. 40(21), pages 2803-2818.
- Bernanke, Ben & Gertler, Mark, 1995.
"Inside the Black Box: The Credit Channel of Monetary Policy Transmission,"
95-15, C.V. Starr Center for Applied Economics, New York University.
- Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
- Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
- Isabel Marques Gameiro & João Sousa, 2010. "Monetary Policy Effects: Evidence from the Portuguese Flow of Funds," Working Papers w201014, Banco de Portugal, Economics and Research Department.
When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_861_12. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.