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Vincenzo Cuciniello

21 September 2021
OCCASIONAL PAPER SERIES - No. 272
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Abstract
Since the European Central Bank’s (ECB’s) 2003 strategy review, the importance of macro-financial amplification channels for monetary policy has increasingly gained recognition. This paper takes stock of this evolution and discusses the desirability of further incremental enhancements in the role of financial stability considerations in the ECB’s monetary policy strategy. The paper starts with the premise that macroprudential policy, along with microprudential supervision, is the first line of defence against the build-up of financial imbalances. It also recognises that the pursuit of price stability through monetary policy, and of financial stability through macroprudential policy, are to a large extent complementary. Nevertheless, macroprudential policy may not be able to ensure financial stability independently of monetary policy, because of spillovers originating from the common transmission channels through which the two policies produce their effects. For example, a low interest rate environment can create incentives to engage in more risk-taking, or can adversely impact the profitability of financial intermediaries and hence their capacity to absorb shocks. The paper argues that the existence of such spillovers creates a conceptual case for monetary policy to take financial stability considerations into account. It then goes on to discuss what this conclusion might imply in practice for the ECB. One option would be to exploit the flexible length of the medium-term horizon over which price stability is to be achieved. Longer deviations from price stability could occasionally be tolerated, if they resulted in materially lower risks for financial stability and, ultimately, for future price stability. ...
JEL Code
E3 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
G01 : Financial Economics→General→Financial Crises
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
20 July 2020
WORKING PAPER SERIES - No. 2445
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Abstract
We use monthly data on individual loans from the Italian Credit Register over the period from 1997 to 2019 and show that bank credit expansions in the non-financial private sector are mostly explained by variations in the extensive margin calculated either in credit flows or headcount of new borrowers. We then build on a flow approach to decompose changes in the net creation of borrowers into gross flows across three states: (i) borrowers, (ii) applicants and (iii) others (neither debtors nor applicants). The paper investigates the macroeconomic dimension of these gross flows and documents three key cyclical facts. First, entries in the credit market by new obligors (“inflows”) account for the bulk of volatility in the net creation of borrowers. Second, the volatility of borrower inflows is two times as large as the volatility of obligors exiting from the credit market (“outflows”). Third, borrower inflows are highly pro-cyclical, lead the economic cycle, and their fluctuations are mainly driven by the probability of getting a loan from new banks. We read these results in light of the macrofinance literature on search frictions and on competition with lender-lender informational asymmetries. Overall, our findings support theoretical predictions of these models, but search frictions seem to play a major role in shaping movements along the extensive margin.
JEL Code
E51 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Money Supply, Credit, Money Multipliers
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy