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FINANCIAL SECTOR INTERCONNECTEDNESS AND MONETARY POLICY TRANSMISSION

Published online by Cambridge University Press:  13 February 2018

Alessandro Barattieri,
Maya Eden and
Dalibor Stevanovic
Alessandro Barattieri*
Affiliation:
Collegio Carlo Alberto and ESG UQAM
Maya Eden
Affiliation:
Brandeis University
Dalibor Stevanovic
Affiliation:
ESG UQAM, CIRPÉE, and CIRANO
*
Address correspondence to: Alessandro Barattieri, Collegio Carlo Alberto and ESG UQAM, Via Real Collegio 30, 10024 Moncalieri (TO), Italy; e-mails: alessandro.barattieri@carloalberto.org (primary), barattieri.alessandro@uqam.ca
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Abstract

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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.

Keywords

Financial Sector InterconnectednessMonetary Policy Transmission Mechanism

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 3 , April 2019, pp. 1074 - 1101
Copyright
Copyright © Cambridge University Press 2018 

Footnotes

We would like to thank Steve Ambler, Susanto Basu, Ben Eden, Patrick Fève, Jeffrey Frieden, Marc Giannoni, Alain Guay, Michel Juillard, Sydney C. Ludvigson, Jean-Stéphane Mésonnier, Kevin Moran, Louis Phaneuf, Thomas Philippon, Franck Portier, Federico Ravenna, Luis Serven, and seminar participants at ESG UQÀM, Bank of France, EUI, Atelier en macroéconomie CIRPÉE-DEEP-TSE 2013, 2013 CEA annual conference, 2014 EEA annual meeting, Central Bank of Ireland, and Peking University HSBC Business School for useful comments and suggestions. Elise Martin provided outstanding research assistance.

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