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The Short-Run Effect of Monetary Policy Shocks on Credit Risk: An Analysis of the Euro Area

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  • Chi Hyun Kim
  • Lars Other

Abstract

We examine the credit channel of monetary policy from 2000 to 2015 in the Euro Area using daily monetary policy shock and credit risk measures in an autoregressive distributed lag model. We find that an expansionary monetary policy shock leads to a short-run increase in the credit risk of non-financial corporations. This dysfunctionality of the credit channel is driven by the crisis-dominated post-2009 period. During this period, market participants may have interpreted expansionary monetary policy shocks as a signal of worsening economic prospects. We further distinguish policy shocks aiming at short- and long-run expectations of market participants, i.e. target and path shocks. The adverse effect disappears for crisis countries when the European Central Bank targets long-run rather than short-run expectations.

Suggested Citation

  • Chi Hyun Kim & Lars Other, 2019. "The Short-Run Effect of Monetary Policy Shocks on Credit Risk: An Analysis of the Euro Area," Discussion Papers of DIW Berlin 1781, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp1781
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit channel; credit spreads; Euro area financial markets; forward guidance; monetary policy; Zero lower bound;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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