FINANCIAL SECTOR INTERCONNECTEDNESS AND MONETARY POLICY TRANSMISSION. (13th February 2018)

• Record Type: Journal Article
• Authors: Barattieri, Alessandro; Eden, Maya; Stevanovic, Dalibor
• Is Part Of: Macroeconomic dynamics. Volume 23:Number 3(2019)
• Page Start: 1074
• Page End: 1101
• Publication Date: 2018-02-13
• Subjects: Financial Sector Interconnectedness, -- Monetary Policy Transmission Mechanism; Macroeconomics -- Periodicals; 339.05
• DOI: 10.1017/S1365100517000177
• Languages: English
• ISSNs: 1365-1005

Abstract

Abstract : We present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to entrepreneurs' net worth, thus affecting the transmission mechanism of monetary policy through the credit channel. We build a model-consistent measure of interconnectedness and document that, in the United States, this measure has increased substantially during the period 1952–2016. Finally, interacting the measure of interconnectedness in a structural vector autoregression and a factor-augmented vector autoregression for the US economy, we find that the impulse responses of several real and financial variables to monetary policy shocks are dampened as interconnectedness increases. We confirm the same result using data from 10 Euro area countries for the period 1999–2016.