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 on the lending and borrowing activity of the different economic sectors. We exploit the information content of the flow-of-funds statistics, that provide the most appropriate framework to analyse the flowing of funds from one sector (the lender) to the other (the borrower). We proceed in two steps. First, we estimate a small VAR model for the euro area over the period 1991Q1 to 2009Q2. Then, we extend the benchmark VAR model in order to include the flow-of-funds series and analyse the response of the latter variables to a contractionary monetary policy shock. We find that the policy tightening is followed by a worsening of the budget deficit; firms cut on their demand for bank loans, partially replacing them with inter-company loans, and draw on their liquidity to try to offset the fall of revenues associated with the slowdown of economic activity; households reduce net borrowing and increase precautionary saving in the short run. Consistent with the bank lending channel of monetary policy at work, the interest rate hike is followed by a short-run deceleration of credit growth, mainly driven by the response of banks. JEL Classification: E32, E4, E52, G11
|Date of creation:||Dec 2011|
|Date of revision:|
|Contact details of provider:|| Postal: 60640 Frankfurt am Main, Germany|
Phone: +49 69 1344 0
Fax: +49 69 1344 6000
Web page: http://www.ecb.europa.eu/
More information through EDIRC
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.
- Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2008. "Business Cycles in the Euro Area," NBER Working Papers 14529, National Bureau of Economic Research, Inc.
- Giannone, Domenico & Lenza, Michele & Reichlin, Lucrezia, 2009. "Business Cycles in the Euro Area," CEPR Discussion Papers 7124, C.E.P.R. Discussion Papers.
- 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.
- Michael Ehrmann, 2004. "Firm Size and Monetary Policy Transmission – Evidence from German Business Survey Data," CESifo Working Paper Series 1201, CESifo Group Munich.
- 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.
- R. Bonci & F. Columba, 2008.
"Monetary policy effects: new evidence from the Italian flow-of-funds,"
Taylor & Francis Journals, vol. 40(21), pages 2803-2818.
- 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.
- 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.
- 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.
- Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
- Leeper, Eric M. & Gordon, David B., 1992.
"In search of the liquidity effect,"
Journal of Monetary Economics,
Elsevier, vol. 29(3), pages 341-369, June.
- Eric M. Leeper & David B. Gordon, 1991. "In search of the liquidity effect," FRB Atlanta Working Paper 91-17, Federal Reserve Bank of Atlanta.
- 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.).
When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20111402. 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: (Official Publications)
If references are entirely missing, you can add them using this form.