Bank lending in an unprecedented monetary tightening cycle: evidence from the euro area

Simone Auer and Antonio Conti ()

No 856, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper assesses the evolution of bank lending to non-financial corporations (NFCs) in the euro area in the context of the ECB's unprecedented monetary tightening in 2022-23. To this end, we use a medium-scale Bayesian Vector Autoregressive model that includes short- and long-term interest rates, business cycle variables and credit demand and supply indicators drawn from the euro-area Bank Lending Survey (BLS). The decrease in credit growth in 2022-23 is found to be larger than expected based on historical regularities in the counterfactual scenario that is obtained by conditioning only on the actual path of interest rates, real GDP and consumer prices. However, when BLS indicators of credit demand and, above all, credit supply are added to the set of conditioning variables, the gap between the counterfactual and the actual path of loans to NFCs is significantly reduced. Our analysis underscores the increased importance of the bank lending channel in influencing credit dynamics during this period, compared with previous episodes of monetary tightening.

Keywords: monetary policy; bank lending channel; interest rate channel; counterfactual scenarios; Bayesian VAR models (search for similar items in EconPapers)
JEL-codes: C32 E32 E37 E51 E52 (search for similar items in EconPapers)
Date: 2024-06
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_856_24

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