Monetary policy transmission in unconventional times The role of financial structure

This thesis presents empirical work on the lending channel of monetary policy and the role of financial structure in Europe. Europe's financial structure is heavily bank-based, which has implications for the transmission of monetary policy. The bias towards banks prompted the Eurosystem to implement several credit easing and liquidity supporting measures in the wake of the Great Financial Crisis of 2008. Have these measures helped to sustain the flow of finance to the real economy? In short, this thesis finds the answer is yes. Using confidential monetary data, the results of this research suggest that the Eurosystem has effectively buttressed the intermediary function of the European financial system. But this thesis also shows that there are lessons to be drawn. First, looking forward to what is likely to be a prolonged period of negative interest rates, the Eurosystem may minimize the distortive effects of monetary policy stimulus on bank performance by specifically targeting longer-term interest rates. Second, ambitious price incentives embedded in the monetary operations can further incentivize banks to increase lending while preventing a dependence on central bank funding. Last, to better foster the flow of finance in adverse circumstances, Europe needs a more diverse financial structure. Stimulating debt creation and risk taking by banks increases the risk of financial instability in Europe's bank-based financial system, because bank-based financial structures are found to be associated with more systemic risk than market-based financial structures.