Policy Uncertainty, Lender of Last Resort and the Real Economy
49 Pages Posted: 9 Aug 2018 Last revised: 21 Aug 2020
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Policy Uncertainty, Lender of Last Resort and the Real Economy
Policy Uncertainty, Lender of Last Resort and the Real Economy
Date Written: August 18, 2020
Abstract
We show that a reduction in lender of last resort (LOLR) policy uncertainty positively affects bank lending and propagates to investment and employment. We exploit a unique policy that reduced uncertainty regarding the availability of future LOLR funding for banks as a quasi-natural experiment. Using micro-level data on banks, firms and loans in Portugal, we generate cross-sectional variation in banks' exposure to uncertainty and find that the size of the haircut subsidy - the gap between private market and central bank security valuations - plays a key role in the propagation of the shock to lending and the real economy.
Keywords: Bank Credit, Haircut Subsidy, Central Bank Liquidity, Policy Uncertainty, Firm-level Employment and Investment
JEL Classification: E44, E52, E58, G21, G32
Suggested Citation: Suggested Citation