Unconventional Monetary Policies and the Credit Market
31 Pages Posted: 14 Apr 2013 Last revised: 20 Dec 2014
Date Written: December 19, 2014
This paper analyzes the ability of unconventional monetary policies to reduce the spread between the credit and the short-term policy interest rates. We provide a theoretical framework based on the bank-lending channel that incorporates an interbank money market. The proposed model shows that the implementation of swap programmes to exchange government bonds for troubled assets is more successful in reducing the credit spread than the creation of central bank lending facilities. Key determinants for policy effectiveness are the market value of the collateral on defaulted loans, the risk premium on the interbank money market, the composition of banks' balance sheet liabilities and the degree of banking competition. The quantitative assessment of the model with real data confirms the appropriate response of the Federal Reserve in recent crisis episodes but sheds some doubts on the European Central Bank intervention. Finally, a sensitivity analysis illustrates the sets of parameters describing the market conditions under which these unconventional measures result in unfavourable outcomes.
Keywords: Bank profit maximization, credit interest rate, optimal credit supply, un-conventional monetary policy
JEL Classification: E41, E50, G21
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