Modeling Bank Lending in the Euro Area: A Non-Linear Approach

46 Pages Posted: 17 Dec 2007

See all articles by Carlotta Rossi

Carlotta Rossi

Bank of Italy

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Date Written: November 2007


This paper investigates possible non-linearities in the response of bank lending to monetary policy shocks in the euro area. The credit market is modeled over the period 1985-2005 by means of an Asymmetric Vector Error Correction Model (AVECM) involving four endogenous variables (loans to the private sector, real GDP, lending rate, and consumer price index) and one exogenous variable (money market rate). The main features of the model are the existence of two co-integrating equations representing the long-run credit demand and supply and the possibility for loading and lagged-term coefficients to assume different values depending on the monetary policy regime (easing or tightening). The paper finds that the effect on credit, GDP, and prices of a monetary policy tightening is larger than the effect of a monetary policy easing. This result supports the existence of an asymmetric broad credit channel in the euro area.

Keywords: monetary policy transmission, credit market, credit view, asymmetries

JEL Classification: C32, C51, E44, E52

Suggested Citation

Rossi, Carlotta and Gambacorta, Leonardo, Modeling Bank Lending in the Euro Area: A Non-Linear Approach (November 2007). Bank of Italy Temi di Discussione (Working Paper) No. 650, Available at SSRN: or

Carlotta Rossi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

Leonardo Gambacorta (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002

Centre for Economic Policy Research (CEPR)

United Kingdom

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