Mending the Broken Link: Heterogeneous Bank Lending and Monetary Policy Pass-Through
54 Pages Posted: 3 Feb 2017
Date Written: November 16, 2016
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
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