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Stocks or flows? New thinking about monetary transmission through the lending channel

Javier Villar Burke ()
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Javier Villar Burke: European Commission

No 2016.04, Working Papers from International Network for Economic Research - INFER

Abstract: The lending channel is conventionally understood to transmit monetary policy through the origination of new loans. In this paper, we postulate that the lending channel may also operate via the stock of existing loans. Monetary shocks generate two types of income effects: 1) monthly mortgage payments are impacted when rates are reset; 2) inflation erodes the real value of mortgage payments and increases the disposable income of borrowers. These income effects translate into variations in output due to the heterogeneous propensity to consume of individual economic agents. Three types of factors determine the importance of these income effects for individual households and at macro level: 1) borrowers’ features, such as income distribution, indebtedness and debt burden, 2) loan features, such as the period of rate fixation and 3) price developments. Significant differences in these factors across euro area Member States can distort a homogeneous transmission of the single monetary policy.

Keywords: Euro area; monetary policy; monetary transmission; income effects; lending channel; mortgages. (search for similar items in EconPapers)
JEL-codes: D33 D47 D90 E43 E51 E52 F36 F42 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-ure
Date: 2016
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