Policy Uncertainty, Lender of Last Resort and the Real Economy

49 Pages Posted: 9 Aug 2018 Last revised: 21 Aug 2020

See all articles by Martina Jasova

Martina Jasova

Columbia University, Barnard College - Department of Economics

Caterina Mendicino

European Central Bank (ECB) - Directorate General Research

Dominik Supera

Columbia Business School

Multiple version iconThere are 2 versions of this paper

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

Jasova, Martina and Mendicino, Caterina and Supera, Dominik, Policy Uncertainty, Lender of Last Resort and the Real Economy (August 18, 2020). Available at SSRN: https://ssrn.com/abstract=3216733 or http://dx.doi.org/10.2139/ssrn.3216733

Martina Jasova (Contact Author)

Columbia University, Barnard College - Department of Economics ( email )

3009 Broadway
New York, NY 10027
United States

Caterina Mendicino

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Dominik Supera

Columbia Business School ( email )

772 Kravis Hall
665 W 130th St.
New York, NY 10027
United States

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