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Interest rates, money, and banks in an estimated euro area model

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  • Schabert, Andreas
  • Christoffel, Kai

Abstract

This paper examines monetary transmission and macroeconomic shocks in a medium scale macroeconomic model with costly banking estimated for euro area data. In addition to data on measures of real activity and prices, we include data on bank loans, loan rates, and reserves for the estimation of the model with Bayesian techniques. We find that loans and holdings of reserves affect banking costs to a small but significant extent. Furthermore, shocks to reserve holdings are found to contribute more to variations in the policy rate, inflation and output than shocks to the feedback rule for the policy rate. Hence, holdings of central bank money, which is typically neglected in the literature, plays a substantial role for macroeconomics dynamics. The analysis further shows that exogenous shifts in banking costs hardly play a role for fluctuations in real activity and prices, even during the recent financial crisis. JEL Classification: C54, E52, E32

Suggested Citation

  • Schabert, Andreas & Christoffel, Kai, 2015. "Interest rates, money, and banks in an estimated euro area model," Working Paper Series 1791, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20151791
    Note: 85234
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1791.en.pdf
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    References listed on IDEAS

    as
    1. Durbin, James & Koopman, Siem Jan, 2012. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, edition 2, number 9780199641178.
    2. Cúrdia, Vasco & Woodford, Michael, 2011. "The central-bank balance sheet as an instrument of monetarypolicy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 54-79, January.
    3. Dreger, Christian & Wolters, Jürgen, 2014. "Money demand and the role of monetary indicators in forecasting euro area inflation," International Journal of Forecasting, Elsevier, vol. 30(2), pages 303-312.
    4. Reicher, Claire, 2014. "A set of estimated fiscal rules for a cross-section of countries: Stabilization and consolidation through which instruments?," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 184-198.
    5. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    6. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
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    Cited by:

    1. Agénor, Pierre-Richard & Jia, Pengfei, 2020. "Capital controls and welfare with cross-border bank capital flows," Journal of Macroeconomics, Elsevier, vol. 65(C).
    2. Pierre-Richard Agénor & Alessandro Flamini, 2016. "Institutional Mandates for Macroeconomic and Financial Stability," Centre for Growth and Business Cycle Research Discussion Paper Series 231, Economics, The Univeristy of Manchester.
    3. Pierre-Richard Agénor & Pengfei Jia, 2017. "Macroprudential Policy Coordination in a Currency Union'," Centre for Growth and Business Cycle Research Discussion Paper Series 235, Economics, The Univeristy of Manchester.

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    More about this item

    Keywords

    bayesian estimation; central bank money supply; costly banking; financial shocks;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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