Aggregate Implications of Financial Heterogeneity to the Bank-Lending Channel in Monetary Union

48 Pages Posted: 27 Jan 2021 Last revised: 18 Apr 2021

See all articles by Mai Hakamada

Mai Hakamada

University of California, Santa Cruz, Division of Social Sciences, Department of Economics, Students

Date Written: November 22, 2020

Abstract

In this study, I investigate the impact of heterogeneity in financial frictions across the Eurozone on credit supply dynamics and the effectiveness of bank-lending channel of monetary policy, by integrating empirical and quantitative analysis. Using country-level bank balance sheet data, I estimate financial frictions in the credit supply curve in a two-country, monetary union New Keynesian model with banks. The results indicate that financial frictions in core countries are significantly smaller than peripheral countries. Given this financial heterogeneity, my model predicts that firstly, financial shocks cause more severe recessions in peripheral countries than in core countries. Secondly, the bank-lending channel has a weaker stimulus effect in peripheral countries under the single interest rates policy. Moreover, I find that asset purchase policies, particularly region-specific asset purchases, can curtail the differences in transmission of the bank-lending channel inside a region.

Keywords: financial friction; the Eurozone; monetary union; financial heterogeneity; bank-lending channel

JEL Classification: E44, E52, F45, G21

Suggested Citation

Hakamada, Mai, Aggregate Implications of Financial Heterogeneity to the Bank-Lending Channel in Monetary Union (November 22, 2020). Available at SSRN: https://ssrn.com/abstract=3735629 or http://dx.doi.org/10.2139/ssrn.3735629

Mai Hakamada (Contact Author)

University of California, Santa Cruz, Division of Social Sciences, Department of Economics, Students ( email )

CA
United States

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