The Shadow Value of Unconventional Monetary Policy

Ugo Albertazzi, Lorenzo Burlon, Tomas Jankauskas and Nicola Pavanini

No 17053, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We quantify how central bank unconventional monetary policy, in the form of funding facilities, reduced the banking sector’s intrinsic fragility in the euro area in 2014-2021. We estimate a micro-structural model of imperfect competition in the banking sector that allows for multiple equilibria with bank runs, banks’ default and contagion, and central bank funding. Our framework incorporates demand and supply for insured and uninsured deposits, for loans to firms and households, and borrowers’ default. We use confidential granular data for the euro area banking sector, including information on banks’ borrowing from the European Central Bank (ECB). We document the presence of alternative equilibria with run-type features, but also that central bank interventions exerted a crucial role in containing this risk. Our counterfactuals show that, on average across equilibria, a 1 percentage point reduction in the ECB lending rate leads to a 1.4 percentage points reduction in banks’ default probability.

Keywords: Central bank policies; Bank runs; Multiple equilibria; Imperfect competition; Structural estimation (search for similar items in EconPapers)
JEL-codes: E44 E52 E58 G01 G21 L13 (search for similar items in EconPapers)
Date: 2022-02
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