Paper by Christiaan van der Kwaak published in The Economic Journal

A paper by Associate Professor Christiaan van der Kwaak was published in The Economic Journal. The paper, titled “Unintended Consequences of Central Bank Lending in Financial Crises”, is now available online via the top journal.

In the paper, Christiaan van der Kwaak (associate professor at the Faculty of Economics and Business, Department of Economics, Econometrics and Finance) investigates the macroeconomic impact of central bank funding becoming a more attractive funding source to financial intermediaries in times of crises. He uses a New Keynesian dynamic stochastic general equilibrium (DSGE) model with financial frictions which is estimated using Bayesian techniques, and studies the macroeconomic implications of the European Central Bank’s three-year longer-term refinancing operations (LTROs) for the Italian economy.

Van der Kwaak shows that the requirement to pledge collateral has a contractionary effect on private credit, everything else equal, and thereby reduces the expansionary effect that central bank lending otherwise has. He also shows that the collateral effect can simultaneously explain (part of) Italian banks’ substantial accumulation of domestic government bonds, as well as the limited growth of Italian banks’ private credit by only 2%. Furthermore, he finds that the cumulative negative effects from the collateral effect on private credit, investment, and output can be (more than) offset by the central bank providing more funding per euro of private credit. Finally, Van der Kwaak shows that the longer central bank funding is offered at attractive terms, the larger its expansionary effect.

About The Economic Journal

The Economic Journal is one of the founding journals of modern economics, first published in 1891. It remains one of the top journals in the profession, earning a worldwide reputation for excellence as a general interest journal. The journal provides a platform for high-quality, imaginative economic research, publishing papers in all fields of economics for an international readership. The Economic Journal aims to provide readers with a broad spectrum of high-quality, stimulating papers and welcomes submissions whether they be theoretical, applied, or orientated towards academics or policymakers. The Editorial Board members are all affiliated with leading international institutions and cover a wide range of expertise.

More information:

C G F van der Kwaak, Unintended Consequences of Central Bank Lending in Financial Crises, The Economic Journal, 2023; uead078, https://doi.org/10.1093/ej/uead078

Questions? Please contact Christiaan van der Kwaak.