One Monetary Policy and Two Bank Lending Standards: A Tale of Two Europes 

Sangyup Choi, Kimoon Jeong and Jiseob Kim

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper underscores the underappreciated role of bank mortgage lending standards in conjunction with imbalances stemming from the common monetary policy framework as drivers of divergent economic trajectories in the euro area’s core and periphery countries. To illustrate the mechanism, we compute a country-specific monetary policy stance gap and estimate the panel VAR model of credit and macroeconomy for each group. While the widening gap—the accommodative stance of the ECB relative to individual economic conditions—induces a similar increase in the demand for mortgage credit in both regions, it is followed by markedly different responses of the supply side of mortgage credit: bank mortgage lending standards are relaxed (tightened) in periphery (core) countries, which can rationalize vastly different responses in mortgage credit, residential investment, and housing prices between the two Europes. In searching for the source of different bank lending behaviors, we find that banks in core countries, subject to tighter macroprudential policies and reduced profit margins, increase cross-border lending to periphery countries, enabling them to relax lending standards toward mortgage loans.

Keywords: Euro area; mortgage credit; monetary policy stance gap; bank lending survey; macroprudential policy; cross-border banking flows (search for similar items in EconPapers)
JEL-codes: E21 E32 E44 F52 G21 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2023-10
New Economics Papers: this item is included in nep-ban, nep-eec, nep-fdg, nep-ifn, nep-mac, nep-mon and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2023-56

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