IW monetary outlook December 2015: Weak credit growth hinders eurozone inflation to increase

Michael Hüther and Markus Demary

No 37/2015, IW policy papers from Institut der deutschen Wirtschaft (IW) / German Economic Institute

Abstract: While the ECB still struggles with an impaired bank lending channel of monetary transmission, the Fed successfully fought the labor market slack that was caused by the great recession of 2008. Due to the improved labor market, the Fed can now start its gradual interest rate lift-off. The ECB will increase its stance of policy accommodation instead, since low interest rates still do not translate into higher inflation. On the contrary, inflation and interest rates are decreasing in tandem. The reason for the impaired monetary transmission channel was originally the banking and sovereign debt crisis in the Eurozone, but the impairment of monetary transmission is now caused by banks’ reduction in risk-weighted assets, which are an effect of the implementation of the new Basel III capital ratios. Instead of lending to businesses and households banks increased their exposure to sovereigns. This effect is due to the preferential treatment of sovereign debt in bank regulation and is exacerbated by the low interest rate environment. As long as credit growth does not contribute to the growth of money, reducing interest rates even further will not bring inflation back to its target value. [...]

JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwkpps:372015

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