Unintended Consequences of Central Bank Lending in Financial Crises Christiaan van der Kwaak
By: Kwaak, Christiaan van der
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Material type: 
ArticleSubject(s): BANCOS CENTRALES | PRESTAMOS | CRISIS FINANCIERA
In:
The Economic Journal n.658, february, 2024, p. 728-765Summary: I investigate the macroeconomic impact of central bank funding becoming a more attractive funding source to financial intermediaries in times of crisis. I show that the requirement to pledge collateral has a contractionary effect on private credit, everything else equal, and thereby reduces the expansionary effect that such lending otherwise has. I use an estimated New Keynesian model with financial frictions to show that the collateral effect explains the limited growth of Italian banks’ private credit in response to the European Central Bank’s three-year longer-term refinancing operations. Finally, I explore whether changes in lending policy can offset the cumulative negative effects from the collateral effect.
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| OP 282/2024/657-2 Housing prices and credit constraints in competitive search | OP 282/2024/658 The Economic Journal | OP 282/2024/658-1 Unemployment and Development | OP 282/2024/658-2 Unintended Consequences of Central Bank Lending in Financial Crises | OP 282/2024/659 The Economic Journal | OP 282/2024/659-1 Declining search frictions, unemployment and self-employment | OP 282/2024/659-2 Immigration, female labour supply and local cultural norms |
Bibliografía
I investigate the macroeconomic impact of central bank funding becoming a more attractive funding source to financial intermediaries in times of crisis. I show that the requirement to pledge collateral has a contractionary effect on private credit, everything else equal, and thereby reduces the expansionary effect that such lending otherwise has. I use an estimated New Keynesian model with financial frictions to show that the collateral effect explains the limited growth of Italian banks’ private credit in response to the European Central Bank’s three-year longer-term refinancing operations. Finally, I explore whether changes in lending policy can offset the cumulative negative effects from the collateral effect.
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