Monetary Policy and the Flow of Funds in the Euro Area

49 Pages Posted: 26 Apr 2012

See all articles by Riccardo Bonci

Riccardo Bonci

European Central Bank (ECB); Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: March 16, 2012

Abstract

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 rates on the lending and borrowing activity in different economic sectors. We exploit the information content of the flow-of-funds statistics, providing the best framework to analyse the flow of funds from lenders to borrowers. After estimating a small VAR for the euro area, we extend the benchmark model with the flow-of-funds series, analysing the response of these variables to a contractionary monetary policy shock. We find that the policy tightening is followed by a worsening of the budget deficit, firms cut down on their demand for bank loans, partially replacing them with inter-company loans, and draw on their liquidity to try to offset the fall in revenue associated with the slowdown in economic activity, while households increase precautionary saving in the short run. Consistent with the bank lending channel of monetary policy, the interest rate hike is followed by a short-run deceleration in credit growth, mainly driven by the response of banks.

Keywords: euro area, 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 (March 16, 2012). Bank of Italy Temi di Discussione (Working Paper) No. 861, Available at SSRN: https://ssrn.com/abstract=2045544 or http://dx.doi.org/10.2139/ssrn.2045544

Riccardo Bonci (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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