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Interest rates, money, and banks in an estimated euro area model

Author

Listed:
  • Schabert, Andreas
  • Christoffel, Kai
Abstract
This paper examines monetary transmission and macroeconomic shocks in a medium scale macroeconomic model with costly banking estimated for euro area data. In addition to data on measures of real activity and prices, we include data on bank loans, loan rates, and reserves for the estimation of the model with Bayesian techniques. We find that loans and holdings of reserves affect banking costs to a small but significant extent. Furthermore, shocks to reserve holdings are found to contribute more to variations in the policy rate, inflation and output than shocks to the feedback rule for the policy rate. Hence, holdings of central bank money, which is typically neglected in the literature, plays a substantial role for macroeconomics dynamics. The analysis further shows that exogenous shifts in banking costs hardly play a role for fluctuations in real activity and prices, even during the recent financial crisis. JEL Classification: C54, E52, E32

Suggested Citation

  • Schabert, Andreas & Christoffel, Kai, 2015. "Interest rates, money, and banks in an estimated euro area model," Working Paper Series 1791, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20151791
    Note: 85234
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1791.en.pdf
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    References listed on IDEAS

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    Cited by:

    1. Agénor, Pierre-Richard & Jackson, Timothy & Jia, Pengfei, 2021. "Macroprudential policy coordination in a currency union," European Economic Review, Elsevier, vol. 137(C).
    2. Agénor, Pierre-Richard & Alper, Koray & Pereira da Silva, Luiz, 2018. "External shocks, financial volatility and reserve requirements in an open economy," Journal of International Money and Finance, Elsevier, vol. 83(C), pages 23-43.
    3. Agénor, Pierre-Richard & Flamini, Alessandro, 2022. "Institutional mandates for macroeconomic and financial stability," Journal of Financial Stability, Elsevier, vol. 62(C).
    4. Agénor, Pierre-Richard & Jackson, Timothy P., 2022. "Monetary and macroprudential policy coordination with biased preferences," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    5. Agénor, Pierre-Richard & Jia, Pengfei, 2020. "Capital controls and welfare with cross-border bank capital flows," Journal of Macroeconomics, Elsevier, vol. 65(C).

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    More about this item

    Keywords

    bayesian estimation; central bank money supply; costly banking; financial shocks;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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