The Shadow Value of Central Bank Lending
8mo ago
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libertystreeteconomics.newyorkfed.orgThe Shadow Value of Central Bank Lendingnewyorkfed.orgAfter the Great Financial Crisis, the European Central Bank (ECB) extended its monetary policy toolbox to include the use of long-term loans to banks at interest rates close to zero or even negative. These central bank interventions were aimed at supporting the transmission of expansionary monetary policy and likely played a crucial role in bolstering the financial stability of the euro area, namely by reducing the chance of bank runs. However, quantitative evidence on the effects of these interventions on financial stability remains scant. In this post, we quantify the effectiveness of central bank lending programs in supporting financial stability through the lens of a novel structural model discussed in this paper .
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