The Effectiveness of the Non-standard Policy Measures During the Financial Crises: The Experiences of the Federal Reserve and the European Central Bank

52 Pages Posted: 12 Aug 2013

See all articles by Seth B. Carpenter

Seth B. Carpenter

Board of Governors of the Federal Reserve System

Selva Demiralp

Koc University - Department of Economics

Jens Eisenschmidt

Morgan Stanley

Multiple version iconThere are 2 versions of this paper

Date Written: July 2013

Abstract

A growing number of studies have sought to measure the effects of non-standard policy on bank funding markets. The purpose of this paper is to carry those estimates a step further by looking at the effects of bank funding market stress on the volume of bank lending, using a simultaneous equation approach. By separately modeling loan supply and demand, we determine how nonstandard central bank measures affected bank lending by reducing stress in bank funding markets. We focus on the Federal Reserve and the European Central Bank. Our results suggest that non-standard policy measures lowered bank funding volatility. Lower bank funding volatility in turn increased loan supply in both regions, contributing to sustain lending activity. We consider this as strong evidence for a "bank liquidity risk channel", operative in crisis environments, which complements the usual channels of transmission of monetary policy.

Keywords: Bank lending, non-standard policy, bank funding volatility

JEL Classification: E58, G32, G21

Suggested Citation

Carpenter, Seth B. and Demiralp, Selva and Eisenschmidt, Jens, The Effectiveness of the Non-standard Policy Measures During the Financial Crises: The Experiences of the Federal Reserve and the European Central Bank (July 2013). ECB Working Paper No. 1562, Available at SSRN: https://ssrn.com/abstract=2280496 or http://dx.doi.org/10.2139/ssrn.2280496

Seth B. Carpenter (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2385 (Phone)
202-452-2301 (Fax)

Selva Demiralp

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910 Istanbul
Turkey
+212 338 1842 (Phone)

Jens Eisenschmidt

Morgan Stanley ( email )

1585 Broadway
New York, NY 10036
United States

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