ChaMP Research Network

We present empirical evidence on the transmission of monetary policy to banks’ credit standards (i.e. loan approval criteria) in loans granted to non-financial corporations (NFCs) in the euro area. To this end, we use a confidential survey in which banks are asked about developments in their respective credit markets, coupled with banks’ balance sheets and high-frequency monetary policy shocks. First, we find that poorly capitalized banks are more likely to tighten their credit standards in loans to NFCs. Second, these banks have tended to tighten their credit standards more in loans to SMEs than in loans to large firms during the current restrictive monetary phase. Third, the transmission of monetary policy to credit standards in loans to NFCs is stronger in poorly capitalized banks. Fourth, the relationship between monetary policy and credit standards is driven by large contractionary monetary policy shocks, which reveals important asymmetries in the bank lending channel. Finally, a tightening of the monetary policy stance also increases rejection rates in loans to NFCs, to a greater extent in poorly capitalized banks.

We develop a bottom-up approach to estimating the slope of the primitive form of the New Keynesian Phillips curve, which features marginal cost as the relevant real activity variable. Using quarterly micro data on prices, costs, and output from the Belgian manufacturing sector, we estimate dynamic pass-through regressions that identify the degrees of nominal and real rigidities in price setting. Our estimates imply a high slope for the marginal cost-based Phillips curve, which contrasts with the low estimates of the conventional unemployment or output-based formulations in the literature. We reconcile the difference by demonstrating that, although the pass-through of marginal cost into inflation is substantial, the elasticity of marginal cost with respect to the output gap is low, at least for pre-pandemic data. We also illustrate the advantage of a marginal cost-based Phillips curve for characterizing the transmission of supply shocks to inflation.

In this paper, we investigate whether inflation-targeting monetary policy affects households’ incentives to build resilience against energy price shocks. We utilize a stylized heterogeneous agent New Keynesian model with search and matching frictions in the labor market and nominal asset holdings. We modify the model to include energy in consumption and production, and energy conservation capital, so that energy price fluctuations affect both the supply and demand side of the economy. In such a framework, we study the responses of energy conservation to monetary policy, rising energy prices, and their interaction. We find that monetary policy influences energy intensity of consumption through both the intertemporal elasticity of substitution and labor market allocations. Our model predicts that a weaker policy response to rising energy prices is beneficial in terms of welfare to firm owners, borrowers and workers despite higher consumer price inflation. Such a policy stimulates energy conservation, and results in lower energy intensity and higher resilience against energy price fluctuations. We further find that a policy of looking through energy prices does not yield welfare benefits as it underreacts to consumer prices initially, but overreacts in later periods. Ramsey optimal policy predicts a strong immediate rise in the policy rate with a decline afterwards.