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Bank lending in an unprecedented monetary tightening cycle: evidence from the euro area

Author

Listed:
  • Simone Auer

    (Bank of Italy)

  • Antonio M. Conti

    (Bank of Italy)

Abstract

This paper assesses the evolution of bank lending to non-financial corporations (NFCs) in the euro area in the context of the ECB's unprecedented monetary tightening in 2022-23. To this end, we use a medium-scale Bayesian Vector Autoregressive model that includes short- and long-term interest rates, business cycle variables and credit demand and supply indicators drawn from the euro-area Bank Lending Survey (BLS). The decrease in credit growth in 2022-23 is found to be larger than expected based on historical regularities in the counterfactual scenario that is obtained by conditioning only on the actual path of interest rates, real GDP and consumer prices. However, when BLS indicators of credit demand and, above all, credit supply are added to the set of conditioning variables, the gap between the counterfactual and the actual path of loans to NFCs is significantly reduced. Our analysis underscores the increased importance of the bank lending channel in influencing credit dynamics during this period, compared with previous episodes of monetary tightening.

Suggested Citation

  • Simone Auer & Antonio M. Conti, 2024. "Bank lending in an unprecedented monetary tightening cycle: evidence from the euro area," Questioni di Economia e Finanza (Occasional Papers) 856, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_856_24
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2024-0856/QEF_856_24.pdf
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    References listed on IDEAS

    as
    1. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2019. "Money, Credit, Monetary Policy, and the Business Cycle in the Euro Area: What Has Changed Since the Crisis?," International Journal of Central Banking, International Journal of Central Banking, vol. 15(5), pages 137-173, December.
    2. Margherita Bottero & Antonio M. Conti, 2023. "In the thick of it: an interim assessment of monetary policy transmission to credit conditions," Questioni di Economia e Finanza (Occasional Papers) 810, Bank of Italy, Economic Research and International Relations Area.
    3. Altavilla, Carlo & Pariès, Matthieu Darracq & Nicoletti, Giulio, 2019. "Loan supply, credit markets and the euro area financial crisis," Journal of Banking & Finance, Elsevier, vol. 109(C).
    4. Matteo Ciccarelli & Angela Maddaloni & Jose Luis Peydro, 2015. "Trusting the Bankers: A New Look at the Credit Channel of Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 979-1002, October.
    5. Conti, Antonio M. & Nobili, Andrea & Signoretti, Federico M., 2023. "Bank capital requirement shocks: A narrative perspective," European Economic Review, Elsevier, vol. 151(C).
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    monetary policy; bank lending channel; interest rate channel; counterfactual scenarios; Bayesian VAR models;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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