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Monetary Policy and the Flow of Funds in the Euro Area

45 Pages Posted: 15 Dec 2011  

Riccardo Bonci

European Central Bank (ECB); Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: November 8, 2011


This paper provides new evidence on the transmission of monetary policy in the euro area, assessing the impact of an unexpected increase of the short-term interest on the lending and borrowing activity of the different economic sectors. We exploit the information content of the flow-of-funds statistics, that provide the most appropriate framework to analyze the flowing of funds from one sector (the lender) to the other (the borrower). We proceed in two steps. First, we estimate a small VAR model for the euro area over the period 1991Q1 to 2009Q2. Then, we extend the benchmark VAR model in order to include the flow-of-funds series and analyze the response of the latter variables to a contractionary monetary policy shock. We find that the policy tightening is followed by a worsening of the budget deficit; firms cut on their demand for bank loans, partially replacing them with inter-company loans, and draw on their liquidity to try to offset the fall of revenues associated with the slowdown of economic activity; households reduce net borrowing and increase precautionary saving in the short run. Consistent with the bank lending channel of monetary policy at work, the interest rate hike is followed by a short-run deceleration of credit growth, mainly driven by the response of banks.

Keywords: monetary policy, flow of funds, credit growth

JEL Classification: E32, E4, E52, G11

Suggested Citation

Bonci, Riccardo, Monetary Policy and the Flow of Funds in the Euro Area (November 8, 2011). ECB Working Paper No. 1402. Available at SSRN:

Riccardo Bonci (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184

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