The ECB and the Interbank Market

By Domenico Giannone, M. Lenza, H. Pill, L. Reichlin. Social Science Research Network, 2012

176 citations recorded by the source corpus.

This paper analyses the impact on the macroeconomy of the ECB’s non-standard monetary policy implemented in the aftermath of the collapse of Lehman Brothers in the Fall of 2008. We study in particular the effect of the expansion of the intermediation of transactions across central bank balance sheets as dysfunctional financial markets seize up, which we regard as a key channel of transmission for non-standard monetary policy measures. Our approach is similar to Lenza et al., 2009 but we introduce the important innovation of distinguishing between private intermediation of interbank transactions in the money market and central bank intermediation of bank-to-bank transactions across the Eurosystem balance sheet. We do this by exploiting data drawn from the aggregate Monetary and Financial Institutions (MFI) balance sheet which allows us to construct a new measure of the ‘policy shock’ represented by the ECB’s increasing role as a financial intermediary. We find that bank loans to households and, in particular, to non-financial corporations are higher than would have been the case without the ECB’s intervention. In turn, the ECB’s support has a significant impact on economic activity: two and a half years after the failure of Lehman Brothers, the level of industrial production is estimated to be 2% higher, and the unemployment rate 0.6 percentage points lower, than would have been the case in the absence of the ECB’s non-standard monetary policy measures.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/250e03d45a2ebe2b3ef346b60c03107b31e496bb

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Citations in the corpus

Quantitative Easing and Unconventional Monetary Policy – an Introduction (2012, methodology): “The article by Giannone et al. (2012, this issue) examines the impact of the unconventional policy measures taken by the ECB using a new data set on bank balance sheets that captures, among other things, the volumes of interbank lending and of Eurosystem loans to banks.”
The Euro Interbank Repo Market (2016, unknown): “This is in line with the results of Giannone et al. (2012), who find that the positive impact of the ECB’s non-standard measures on interbank lending appears to diminish after the first quarter of 2009 and may have deterred private intermediation.”
The ECB’s Non-Standard Monetary Policy Measures: The Role of Institutional Factors and Financial Structure (2012, unknown): “Counterfactual exercises on the role of liquidity support measures adopted during the first phase of the financial crisis undertaken by Giannone et al. (2012) indeed suggest that these measures have not been less powerful with respect to avoiding more adverse impacts of the crisis on GDP and…”
Effectiveness and Transmission of the ECB's Balance Sheet Policies (2014, unknown): “4 Several empirical studies on unconventional monetary policy use data starting before the financial crisis, which may not be adequate to assess the effects of the policy measures that were taken in the aftermath of the financial crisis (e.g. Lenza et al. 2010; Giannone et al. 2012; Peersman 2011).”
Conditional Forecasts and Scenario Analysis with Vector Autoregressions for Large Cross-Sections (2015, background): “Assuming that stationarity is achieved via taking first differences3, the DFM is defined as follows: ∆yt = µ+ ΛFt + et, Ft = Φ1Ft−1 + . . .+ ΦpFt−s + ut , ut ∼ WN(0, Q) , where Ft = (F1,t, . . . , Fr,t) ′ is an r-dimensional vector of common factors, with r much smaller than n and Λ is an n × r…”
Measuring systemic risk in the European banking sector: a copula CoVaR approach (2017, background): “To alleviate the liquidity crunch, the European Central Bank (ECB) and the Federal Reserve (Fed) reduced the interest rates they charge financial institutions to borrow from them; they also expanded their balance sheets by broadening the type of collateral that banks could use, as well as increased ”
Monetary policy and bank lending in a low interest rate environment: Diminishing effectiveness? (2017, background): “For a general assessment of the impact of ECB’s non-standard monetary policy measures on the euro area economy see Giannone et al (2012), who find small but significant effects on both loans and real economic activity.”