Bank Lending, Collateral, and Credit Traps in a Monetary Union

Giuseppe Corbisiero
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Giuseppe Corbisiero: Central Bank of Ireland

No 02/RT/16, Research Technical Papers from Central Bank of Ireland

Abstract: This paper provides a theory to investigate the transmission of non-standard monetary policy to corporate lending in a monetary union where financial frictions limit firms’ access to external finance. The model incorporates a banking-sovereign nexus by assuming that sovereign default would generate a liquidity shock severely hitting domestic banks’ balance sheet. I find that this feature crucially impairs the transmission of monetary policy, generating asymmetric lending responses and the risk of contagion across economies. In particular I show that, in some circumstances, the liquidity injected into the risky country’s banks results in financing the sovereign rather than boosting lending, and sovereign risk in one country generates negative spillover effects on lending throughout the monetary union via the collateral channel. The model sheds light on the troubled transmission of the ECB’s policy measures to the economy of stressed countries during the euro sovereign debt crisis.

Keywords: Bank Lending; Sovereign Risk; Monetary Policy; Crisis; Euro Area (search for similar items in EconPapers)
JEL-codes: E44 E52 F36 G01 G33 (search for similar items in EconPapers)
Date: 2016-03
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-dge, nep-eec, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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