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Monetary policy through the ‘credit-cost channel’: Italy and Germany pre- and post-EMU

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  • Giuliana Passamani
  • Roberto Tamborini

Abstract

We present an empirical analysis of the ‘Credit-Cost Channel’ (CCC) of monetary policy transmission. This channel combines bank credit supply and interest rates on loans as a cost to firms. The thrust of the CCC is that it makes both aggregate demand and aggregate supply dependent on monetary policy. As a consequence (1) credit market conditions (e.g. risk spreads) are important sources and indicators of macroeconomic shocks, (2) the real effects of monetary policy are larger and persistent. We have applied the Cointegrated Vector Autoregression (CVAR) econometric methodology to Italy and Germany in the ‘hard’ EMS period and in the European Monetary Union (EMU) period. The short-run and long-run effects of the CCC are detectable for both countries in both periods. Simulation of the estimated model also confirms that inflation-targeting by way of inter-bank rate control stabilizes inflation through structural shifts of the stochastic equilibrium paths of both inflation and the output.

Suggested Citation

  • Giuliana Passamani & Roberto Tamborini, 2013. "Monetary policy through the ‘credit-cost channel’: Italy and Germany pre- and post-EMU," Applied Economics, Taylor & Francis Journals, vol. 45(29), pages 4095-4113, October.
    • Handle: RePEc:taf:applec:v:45:y:2013:i:29:p:4095-4113
    DOI: 10.1080/00036846.2012.748176
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    References listed on IDEAS

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    1. Fiorella De Fiore & Oreste Tristani, 2013. "Optimal Monetary Policy in a Model of the Credit Channel," Economic Journal, Royal Economic Society, vol. 123(571), pages 906-931, September.
    2. Lawrence Christiano & Roberto Motto & Massimo Rostagno, 2007. "Two Reasons Why Money and Credit May be Useful in Monetary Policy," NBER Working Papers 13502, National Bureau of Economic Research, Inc.
    3. Altunbas, Yener & Gambacorta, Leonardo & Marques-Ibanez, David, 2010. "Bank risk and monetary policy," Journal of Financial Stability, Elsevier, vol. 6(3), pages 121-129, September.
    4. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679.
    5. Ehrmann, Michael & Backé, Peter, 2003. "Monetary policy transmission in the euro area: any changes after EMU?," Working Paper Series 240, European Central Bank.
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    Cited by:

    1. Tamborini, Roberto, 2009. "The "Credit-Cost Channel" of Monetary Policy. A Theoretical Assessment," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-23.
    2. Luigi Bonatti & Andrea Fracasso & Roberto Tamborini, 2020. "COVID-19 and the Future of Quantitative Easing in the Euro Area: Three Scenarios with a Trilemma," DEM Working Papers 2020/11, Department of Economics and Management.

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