Ebook Money, credit, monetary policy and the business cycle in the euro area
Characterizing the behavior of loans and monetary aggregates over the business cycle and the effect of monetary policy on their dynamics is a key step for understanding the role of financial markets in the real economy.
There are many studies for the Euro Area and the US using rich cross-sectional or panel information on credit variables which focus on this question, but only few studies are based on a sufficiently long sample so as to be able to assess cyclical features or impulse response functions to monetary policy shocks. On the other hands, dynamic macroeconomic studies are typically based on models of small dimension where the more detailed information of disaggregated data is lost.
In this paper we have constructed a data-set of monthly variables for the Euro Area containing information on real, nominal variables and, crucially, disaggregated loans variables and their corresponding interest rates as well as money aggregates and their own rate (a total of 31 variables). This data-set, although not as detailed as cross-sectional studies using disaggregated loans, is the richest attainable for a sample long enough to be suitable for dynamic analysis.
The paper develops an empirical model suitable for the analysis of this rich data-set and analyzes both the response of all variables to an identified monetary policy shock and the cyclical behavior of key credit and monetary variables as well as interest rates.
The first objective is to uncover stylized facts for the Euro Area on the transmission mechanism. Unlike as for the US, these stylized facts are far from being established. The second objective is to focus in particular on money aggregates and loans and analyze their cyclical behavior. Again, not much is known on this issue. Are loans to households behaving like loans to non financial corporation? Are loans pro or anti-cyclical? Do they lag or lead the cycle? For what concerns monetary aggregates, we want to understand the extent of the liquidity effects for money with different liquidity as well as to their cyclical behavior.
Similar studies focusing on loans have been performed on US data (see, for example Bernanke and Blinder, 1992; Bernanke and Gertler, 1995; Christiano, Eichenbaum, and Evans, 1996; den Haan, Sumner, and Yamashiro, 2007). In that literature the different response of loans to households and to the business sector to changes in interest rates has been used as an identification device to discriminate between different “stories” on the credit channel. This paper is the first attempt at deriving stylized facts for the euro area.
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