Title: Unconventional monetary policies and the credit market

Authors: Jose Olmo; Marcos Sanso-Navarro

Addresses: School of Social Sciences, Department of Economics, University of Southampton, Room 3015, Bld 58 (Murray Bld), Highfield Campus, Southampton, SO17 1BJ, UK ' Departamento de Análisis Económico, Universidad de Zaragoza, 50009 Zaragoza, Spain

Abstract: We propose a theoretical model based on the bank lending channel to assess the ability of lending facilities and swap programs to affect the credit interest rate. The model predicts the success of both unconventional monetary measures in reducing the credit interest rate under very general conditions. The comparison between measures reveals the outperformance of lending facilities over swap programs if i) the risk premium on the interbank money market is sizeable and the yield on government bonds is low, ii) the share of bank lending obtained from the central bank is below some specific threshold, iii) the interest rate offered by the central bank on excess reserves is high, and iv) the default rate on loans is high. The quantitative assessment of the model with real data confirms the appropriate response of the Federal Reserve in recent crisis episodes but sheds some doubts on the European Central Bank intervention.

Keywords: bank profit maximisation; credit interest rate; optimal credit supply; UMP; unconventional monetary policy.

DOI: 10.1504/IJMEF.2018.095777

International Journal of Monetary Economics and Finance, 2018 Vol.11 No.5, pp.480 - 498

Received: 27 Oct 2016
Accepted: 02 Jun 2017
Published online: 22 Oct 2018 *

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