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Does the lack of financial stability impair the transmission of monetary policy?

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  • Acharya, Viral V.
  • Imbierowicz, Björn
  • Steffen, Sascha
  • Teichmann, Daniel

Abstract

We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the period from January 2006 to June 2010. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan spreads for high-risk banks for maturities beyond one year, even as it lowers deposit spreads for both high- and low-risk banks. This adversely affects the balance sheets of high-risk bank borrowers, leading to lower payouts, lower capital expenditures, and lower employment. Overall, our results suggest that banks’ capital constraints at the time of an easing of monetary policy pose a challenge to the effectiveness of the bank-lending channel and the central bank's lender of last resort function.

Suggested Citation

  • Acharya, Viral V. & Imbierowicz, Björn & Steffen, Sascha & Teichmann, Daniel, 2020. "Does the lack of financial stability impair the transmission of monetary policy?," Journal of Financial Economics, Elsevier, vol. 138(2), pages 342-365.
    • Handle: RePEc:eee:jfinec:v:138:y:2020:i:2:p:342-365
    DOI: 10.1016/j.jfineco.2020.06.011
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    More about this item

    Keywords

    Central bank liquidity; Monetary policy transmission; Corporate deposits; Financial crisis; Lender of last resort; Loans; Real effects;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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