Mending the Broken Link: Heterogeneous Bank Lending and Monetary Policy Pass-Through

54 Pages Posted: 3 Feb 2017

See all articles by Carlo Altavilla

Carlo Altavilla

European Central Bank (ECB)

Fabio Canova

BI Norwegian Business School

Matteo Ciccarelli

European Central Bank (ECB)

Date Written: November 16, 2016

Abstract

We analyse the pass-through of monetary policy measures to lending rates to firms and households in the euro area using a unique bank-level dataset. Bank balance sheet characteristics such as the capital ratio and the exposure to sovereign debt are responsible for the heterogeneity of pass-through of conventional monetary policy changes. The location of a bank is instead irrelevant. Non-standard measures normalized the capacity of banks to grant loans resulting in a significant compression in lending rates. Banks with a high level of non-performing loans and a low capital ratio were the most responsive to the measures. Finally, we quantify the effects of non-standard policies on the real economic activity using a standard macroeconomic model and find that in absence of these measures both inflation and output would have been significantly lower.

Keywords: monetary policy pass-through, bank balance sheet characteristics

JEL Classification: C3, E4, E5, G2

Suggested Citation

Altavilla, Carlo and Canova, Fabio and Ciccarelli, Matteo, Mending the Broken Link: Heterogeneous Bank Lending and Monetary Policy Pass-Through (November 16, 2016). ECB Working Paper No. 1978, Available at SSRN: https://ssrn.com/abstract=2910931

Carlo Altavilla (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Fabio Canova

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Matteo Ciccarelli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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