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

Author

Listed:
  • Javier Villar Burke

    (European Commission)

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.

Suggested Citation

  • Javier Villar Burke, 2016. "Stocks or flows? New thinking about monetary transmission through the lending channel," Working Papers 2016.04, International Network for Economic Research - INFER.
    • Handle: RePEc:inf:wpaper:2016.04
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Euro area; monetary policy; monetary transmission; income effects; lending channel; mortgages.;
    All these keywords.

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