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RAPPORT

Money, credit, monetary policy and the business cycle in the euro area.

What has changed since the crisis?

The aim of this paper is to study the stylized facts on the macro-financial linkages in the euro area and, then, to analyse their stability during the recent global financial crisis and euro area sovereign debt crisis. In particular, the focus is on whether the developments in the course of the recent crises reveal a significant break in the relation between financial intermediation and the rest of the euro area and the global economy.

A large VAR model is estimated, by using Bayesian techniques, in order to derive the stylized facts on the euro area in an encompassing framework. The model includes the most relevant macroeconomic and financial aggregates. In particular, detailed credit and monetary blocks are included. Loans and the corresponding lending rates are disaggregated by holding sector - corporate and household mainly - and maturity. Monetary aggregates include M1, M2 and M3. In addition, we distinguish among all the categories of deposits which are part of M3. The latter include overnight deposits, saving deposits and time deposits with maturity up to two years.

On the basis of the bayesian VAR model, we analyse the cyclical characteristics of our large set of variables in the pre-crisis period (January 1992 to September 2008). We perform this analysis by means of impulse response functions to a shock which we label cyclical, constructed as the linear combination of shocks explaining the bulk of the cyclical variation of variables describing real economic activity. This should not be thought as a structural identification but, rather, as a statistical device, which provides a summary description of contemporaneous, leading and lagged correlations at business cycle frequencies over the typical cycle. Indeed, we find that the response to an adverse cyclical shock reflects the narrative of typical recessions: economic activity and prices decline, and so do interest rates, as monetary policy becomes more accommodative.

In order to study the mechanisms through which the cyclical shocks transmit to the euro area economy, we also identify (by means of recursive identification techniques) a monetary policy shock. The comparison between responses to the monetary and cyclical shocks allows us to describe the main fac- tors behind the cyclical correlations. The empirical results show that the monetary policy shocks have contractionary effects and, hence, they imply a negative correlation between short-term interest rates and economic activity. Instead, as mentioned above, in a typical downturn this correlation is positive, due to the systematic monetary policy reaction. This difference in conditional correlations in typical and in policy induced downturns allows us to qualitatively assess the relative importance of real effects and changes in the interest rates for the financial intermediation dynamics along the business cycle. Broadly speaking, the comparison of the responses to the two shocks provides some information about the elasticities of different variables to economic activity and interest rates.

Finally, we address the question whether the recent period of turmoil was characterized by a significant break in the dynamic interrelationships between financial intermediation and the rest of the economy. The analysis is carried out by constructing counterfactual paths for loans, deposits and interest rates in the period October 2008 to February 2018. Such counterfactual paths correspond to those we would have observed, given (i) the pre-crisis historical regularities in the euro area and (ii) the observed behavior of real and inflation data in the course of 2008-2018. Relevant deviations of the estimated counterfactual path from actual realizations reveal anomalies in the transmission process, specific to the recent prolonged period of crisis. The pre-crisis empirical regularities are established using a sam- ple that includes two recessions: the one experienced in the early nineties and the early millennium slowdown. Crucially, these are not episodes of major financial disruption. Hence, relevant deviations of the estimated counterfactual path from actual realizations suggest anomalies in the transmission mechanisms, in the nature of the shocks or in their relative importance, specific to the recent financial crisis.

Our results reveal an interesting dichotomy between short and long-term loans and deposits. While the developments in overnight deposits, saving deposits and corporate loans with maturity of less than one year do not appear to reflect any significant break, this has not been the case for deposits and loans (both to firms and households) at longer maturity. More in details, loans to households have been weaker than expected since the early phases of the financial crisis, while weaknesses in long-term loans to firms are more associated with the financial fragmentation emerged in euro area countries during the sovereign crisis. Interestingly, the observed path of the three months Euribor (an interbank interest rate, often considered as a proxy of the policy rate in empirical studies) is quite close to the median of the distribution of its counterfactual path, i.e., the interbank market rates have roughly behaved according to historical regularities with respect to the business cycle in the euro area. This contrasts with exceptionally high long-term interest rates and suggests that while the monetary policy rule describing systematic policy has been stable, the transmission mechanism after 2008 was impaired.

The heterogeneity between the short- and the long-end of the maturity structure of euro area bank

Money, credit, monetary policy and the business cycle in the euro area: what has changed since the crisis?

assets and liabilities, and corresponding interest rates, suggest some promising directions to improve economic modelling. Such heterogeneity emerges both in the analysis of the pre-crisis stylized facts and in the post-crisis dynamics, revealing a market segmentation that is not just a feature of specific shocks or economic regimes. Despite the progress in the modelling of macro-financial linkages stimulated by the extended period of financial turmoil of the last decade, the characterization of the banking sector has remained still quite stylized, largely failing to capture some of the relevant aspects of the segmentation highlighted in this paper. For example, among other things, the portfolio effects that turn out as important drivers of the long-end of bank liabilities play generally a small role, if any, in macroeconomic models with banking.

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