Working Paper: CEPR ID: DP8844
Authors: Domenico Giannone; Michele Lenza; Huw Pill; Lucrezia Reichlin
Abstract: 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.
Keywords: Interbank market; Non-standard monetary policy measures
JEL Codes: E5; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ECB's non-standard monetary policy measures (E52) | higher bank loans to households and non-financial corporations (G21) |
| ECB's non-standard monetary policy measures (E52) | industrial production (L69) |
| ECB's non-standard monetary policy measures (E52) | unemployment rate (J64) |
| ECB's intervention (E52) | mitigated dysfunction in the interbank market (E44) |