Does the Lack of Financial Stability Impair the Transmission of Monetary Policy?

60 Pages Posted:

See all articles by Viral V. Acharya

Viral V. Acharya

Government of India - Reserve Bank of India

Bjorn Imbierowicz

affiliation not provided to SSRN

Sascha Steffen

Frankfurt School of Finance & Management

Daniel Teichmann

Goethe University Frankfurt - House of Finance

Date Written: April 7, 2019

Abstract

We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the January 2006 to June 2010 period. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan spreads for high-risk banks, even as it lowers deposit rates for both high-risk and low-risk banks. This adversely affects the balance sheets of high-risk bank borrowers, leading to lower payouts, lower capital expenditures, and lower employment. Overall, our results suggest that banks’ capital constraints at the time of an easing of monetary policy pose a challenge to the effectiveness of the bank lending channel and the effectiveness of the central bank as a lender of last resort.

Keywords: Central bank liquidity, Monetary policy transmission, Corporate deposits, Financial crisis, Lender of last resort, Banking crisis, Loans, Real effects

JEL Classification: E43, E58, G01, G21

Suggested Citation

Acharya, Viral V. and Imbierowicz, Bjorn and Steffen, Sascha and Teichmann, Daniel, Does the Lack of Financial Stability Impair the Transmission of Monetary Policy? (April 7, 2019). CFS Working Paper, No. 620, 2019. Available at SSRN: https://ssrn.com/abstract=

Viral V. Acharya

Government of India - Reserve Bank of India

Bakery Junction Service Road
Vazhuthacaud
Thiruvananthapuram, Kerala 695033
India

Bjorn Imbierowicz

affiliation not provided to SSRN

No Address Available

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

Daniel Teichmann

Goethe University Frankfurt - House of Finance ( email )

Grüneburgplatz 1
Frankfurt am Main, DE 60323
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
4
Abstract Views
28
PlumX Metrics