Heterogeneous Transmission Mechanism: Monetary Policy and Financial Fragility in the Eurozone

54 Pages Posted: 16 Jul 2013

See all articles by Matteo Ciccarelli

Matteo Ciccarelli

European Central Bank (ECB)

Angela Maddaloni

European Central Bank (ECB)

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Date Written: July 2013

Abstract

The eurozone economic activity and banking sector have shown substantial fragility over the last years with remarkable country heterogeneity. Using detailed data on lending conditions and standards, we analyse – along several key dimensions of heterogeneity – how financial fragility has affected the transmission mechanism of the single eurozone monetary policy. The analysis shows that the monetary transmission mechanism is time‐varying and influenced by the financial fragility of the sovereigns, banks, firms and households. The impact of monetary policy on aggregate output is stronger during the financial crisis, especially in countries facing increased sovereign financial distress. This amplification mechanism, moreover, operates through the credit channel, both the bank lending and the non‐financial borrower balance‐sheet channels. Our results suggest that the bank‐lending channel has been to a large extent neutralized by the ECB non‐standard monetary policy interventions, but the policy framework until the end of 2011 was insufficient to overcome credit availability problems stemming from deteriorated firm net worth and risk conditions, especially for small firms in countries under stress.

Suggested Citation

Ciccarelli, Matteo and Maddaloni, Angela and Peydro, Jose-Luis, Heterogeneous Transmission Mechanism: Monetary Policy and Financial Fragility in the Eurozone (July 2013). Economic Policy, Vol. 28, Issue 75, pp. 459-512, 2013, Available at SSRN: https://ssrn.com/abstract=2294274 or http://dx.doi.org/10.1111/1468-0327.12015

Matteo Ciccarelli (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Angela Maddaloni

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jose-Luis Peydro

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

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