In the thick of it: an interim assessment of monetary policy transmission to credit conditions

Margherita Bottero and Antonio Conti ()

No 810, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We use a thick modelling approach to assess the transmission of the unprecedented ECB’s monetary policy hiking cycle, which started in July 2022, to the cost of credit to euro area and Italian non-financial corporations. We uncover two findings. First, the range of forecasts obtained via this approach is wide; simple projections based only on a common trend between reference and lending rates fall in the lower part of it. Second, borrower riskiness emerges in the current juncture as a key driver in explaining the evolution of lending rates, improving substantially forecasts’ accuracy. We also quantify the additional upward risks on lending rates that may stem from unexpected tensions related to sudden outflows of retail deposits and the reduction of the Eurosystem’s balance sheet. Finally, we assess the impact of an adverse credit supply shock on output and inflation dynamics using a Bayesian VAR. The overall results of the paper support the conclusion that a large amount of the effects of monetary tightening is still in the pipeline.

Keywords: monetary policy transmission; bank lending channel; credit supply; thick modelling; VAR (search for similar items in EconPapers)
JEL-codes: C32 E32 E37 E51 E52 (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fdg and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_810_23

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