Policy uncertainty, lender of last resort and the real economy
Caterina Mendicino and
Journal of Monetary Economics, 2021, vol. 118, issue C, 381-398
A reduction in lender of last resort (LOLR) policy uncertainty positively affects bank lending and propagates to investment and employment. We exploit a unique policy that reduced uncertainty regarding the availability of future LOLR funding for banks as a quasi-natural experiment. Using micro-level data on banks, firms and loans in Portugal, we generate cross-sectional variation in banks’ exposure to uncertainty and find that the size of the haircut subsidy - the gap between private market and central bank security valuations - plays a key role in the propagation of the shock to lending and the real economy.
Keywords: Bank credit; Central bank commitment; Real effects (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 G21 G32 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:118:y:2021:i:c:p:381-398
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