Policy uncertainty, lender of last resort and the real economy

Martina Jasova, Caterina Mendicino and Dominik Supera

No 2521, Working Paper Series from European Central Bank

Abstract: We show that 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. JEL Classification: E44, E52, E58, G21, G32

Keywords: bank credit; central bank liquidity; firm-level employment and investment; haircut subsidy; policy uncertainty (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-mac and nep-mon
Note: 1774743
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212521

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