Since the onset of the financial markets’ crisis in late 2008, the Eurozone has been subject to rather volatile headline inflation, occasionally even turning into (an admittedly modest) deflation. As eventually, conventional monetary policy seemed to be exhausted, the European Central Bank (ECB) resorted to unprece- dented unconventional measures. In 2010, it launched a first gov- ernment bond purchasing programme, which was followed by a series of different programmes, swelling its balance sheet to c. €4.7tn as per May 2019. The induced asset-price-inflation in con- junction with a continuous and persistently low HICP inflation rates inevitably raises the question how effective monetary trans- mission – particularly via asset-prices – (still) is.
This contribution will investigate the effects of monetary asset- price transmission on investments and inflation. First, it analyses the reliability of stock markets as an indicator for firms’ investment, while emphasising the importance of uncertainty. Sec- ond, the paper examines how rising stock prices affected firms’ balance sheet and lending. Further, it provides an explanation as to why monetary policy failed to amplify lending in peripheral mem- ber states and why it had a comparatively low effect on borrowing costs in these regions. Third, it scrutinises the implication of an output gap, which monetary policy seeks to create, on different inflation parameters. Thus, the paper illustrates why the effects on HICP-inflation are less pronounced compared to other inflation measures.
Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications
