Working Paper: CEPR ID: DP18467
Authors: Miguel Ampudia; Manuel A. Muñoz; Frank Smets; Alejandro Van der Ghote
Abstract: We provide evidence that the ECB system-wide dividend recommendation (SWDR) of March 2020 contributed to sustain lending, had a negative but moderate and transitory impact on bank stock prices and largely operated as a deferral of dividend payouts rather than as a dividend cut. Then, we develop a quantitative macro-banking DSGE model that accounts for this evidence and captures the key mechanism through which SWDRs operate to study the general equilibrium effects of the ECB SWDR. The measure contributed to sustain aggregate bank lending and mitigate the adverse impact of the COVID-19 shock on economic activity by safeguarding euro area banks’ capitalization. Welfare-maximizing SWDRs stabilize the economy regardless of the shock type but they only induce significant welfare gains in response to financial shocks.
Keywords: COVID-19; Dividend Recommendation; Dividend Prudential Target; DPT
JEL Codes: E44; E58; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| SWDR (Y40) | economic stability (E63) |
| SWDR (Y40) | bank lending (G21) |
| SWDR (Y40) | bank stock prices (G21) |
| perception of SWDR (J83) | expectations regarding future dividend payouts (G35) |