Monetary policy transmission through banks when liquidity is abundant but unevenly distributed

Mattia Girotti and Guillaume Horny

Finance Research Letters, 2023, vol. 56, issue C

Abstract: We study how the distribution of excess liquidity amongst banks alters the transmission of policy rate hikes to bank interest rates. Using a difference-in-difference approach, we measure the difference in the pricing behavior of the 19 euro-area banking systems depending on their excess liquidity holdings when the European Central Bank’s Deposit Facility Rate (DFR) increases. According to our estimations, every 100 bp increase in the DFR, banking systems holding one additional standard deviation of excess liquidity apply a 1.9 bp higher interest rate on new checking accounts and between 3.2 and 6.8 bp lower interest rates on new loans.

Keywords: Monetary policy transmission; Excess liquidity; Banks; Interest rates; Money market (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:56:y:2023:i:c:s1544612323004336

DOI: 10.1016/j.frl.2023.104061

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