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Unconventional monetary policies and the credit market

Unconventional monetary policies and the credit market
Unconventional monetary policies and the credit market
We propose a theoretical model based on the bank lending channel to assess the ability of lending facilities and swap programmes to affect the credit interest rate. The model predicts the success of both unconventional monetary measures in reducing the credit interest rate under very general conditions. The comparison between measures reveals the outperformance of lending facilities over swap programmes if i) the risk premium on the interbank money market is sizeable and the yield on government bonds is low, ii) the share of bank lending obtained from the central bank is below some specific threshold, iii) the interest rate offered by the central bank on excess reserves is high, and iv) the default rate on loans is high. The quantitative assessment of the model with real data
con…firms the appropriate response of the Federal Reserve in recent crisis episodes but sheds some doubts on the European Central Bank intervention.
1752-0479
480-498
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Sanso-Navarro, Marcos
39ed49fd-2d29-4763-898b-9117bf977956
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Sanso-Navarro, Marcos
39ed49fd-2d29-4763-898b-9117bf977956

Olmo, Jose and Sanso-Navarro, Marcos (2018) Unconventional monetary policies and the credit market. International Journal of Monetary Economics and Finance, 11 (5), 480-498. (doi:10.1504/IJMEF.2018.095777).

Record type: Article

Abstract

We propose a theoretical model based on the bank lending channel to assess the ability of lending facilities and swap programmes to affect the credit interest rate. The model predicts the success of both unconventional monetary measures in reducing the credit interest rate under very general conditions. The comparison between measures reveals the outperformance of lending facilities over swap programmes if i) the risk premium on the interbank money market is sizeable and the yield on government bonds is low, ii) the share of bank lending obtained from the central bank is below some specific threshold, iii) the interest rate offered by the central bank on excess reserves is high, and iv) the default rate on loans is high. The quantitative assessment of the model with real data
con…firms the appropriate response of the Federal Reserve in recent crisis episodes but sheds some doubts on the European Central Bank intervention.

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Accepted/In Press date: 2 June 2017
e-pub ahead of print date: 10 October 2018

Identifiers

Local EPrints ID: 418369
URI: http://eprints.soton.ac.uk/id/eprint/418369
ISSN: 1752-0479
PURE UUID: 0562790d-2d30-4fb9-b1dc-0413ed30696b
ORCID for Jose Olmo: ORCID iD orcid.org/0000-0002-0437-7812

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Date deposited: 03 Mar 2018 17:30
Last modified: 07 Oct 2020 04:08

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Author: Jose Olmo ORCID iD
Author: Marcos Sanso-Navarro

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