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In the thick of it: an interim assessment of monetary policy transmission to credit conditions

Author

Listed:
  • Margherita Bottero

    (Bank of Italy)

  • Antonio M. Conti

    (Bank of Italy)

Abstract

We use a thick modelling approach to assess the transmission of the unprecedented ECB’s monetary policy hiking cycle, which started in July 2022, to the cost of credit to euro area and Italian non-financial corporations. We uncover two findings. First, the range of forecasts obtained via this approach is wide; simple projections based only on a common trend between reference and lending rates fall in the lower part of it. Second, borrower riskiness emerges in the current juncture as a key driver in explaining the evolution of lending rates, improving substantially forecasts’ accuracy. We also quantify the additional upward risks on lending rates that may stem from unexpected tensions related to sudden outflows of retail deposits and the reduction of the Eurosystem’s balance sheet. Finally, we assess the impact of an adverse credit supply shock on output and inflation dynamics using a Bayesian VAR. The overall results of the paper support the conclusion that a large amount of the effects of monetary tightening is still in the pipeline.

Suggested Citation

  • 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.
    • Handle: RePEc:bdi:opques:qef_810_23
    as

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    References listed on IDEAS

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    Cited by:

    1. Antonio Maria Conti & Stefano Neri & Alessandro Notarpietro, 2024. "Credit strikes back: the macroeconomic impact of the 2022-23 ECB monetary tightening and the role of lending rates," Questioni di Economia e Finanza (Occasional Papers) 884, Bank of Italy, Economic Research and International Relations Area.
    2. 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.

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    More about this item

    Keywords

    monetary policy transmission; bank lending channel; credit supply; thick modelling; VAR;
    All these keywords.

    JEL classification:

    • 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
    • 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
    • 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

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