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Central banks and credit creation: the transmission channel via the banks matters

Goodhart, Charles, Bartsch, Elga and Ashworth, Jonathan (2016) Central banks and credit creation: the transmission channel via the banks matters. Sveriges Riksbank Economic Review, 3. pp. 55-68. ISSN 2001-029X

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Abstract

A starting point for a discussion of central banks’ mandates is the effectiveness of their policies. Such effectiveness has been called into question since policy rates hit the ZLB, given the inability of central banks to boost bank lending and drive a sustainable recovery in economic growth. In this paper, we analyse why, and discuss the process of credit creation. Increasingly, central bank watchers question whether monetary policy measures can significantly boost credit creation. The discussion of monetary policy has mostly, and excessively, concentrated on the direct links between the riskless official policy rate, and expectations thereof, ignoring all consideration of banks, of other financial intermediaries, of credit creation or of broad money growth. We question whether this is correct. Repeated easing initiatives seem to have had a diminishing effect on financial markets, portfolio reallocation, and economic sentiment. Central banks’ ability to boost bank lending also crucially depends on financial regulation, fiscal policy and structural reforms. In our view, the main reason for the ineffectiveness of monetary policy has been the weakness of the banking sector.

Item Type: Article
Official URL: http://www.riksbank.se/en/Press-and-published/Publ...
Additional Information: © The Authors
Divisions: Financial Markets Group
Subjects: H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Financial Markets Group (FMG)
Date Deposited: 14 Dec 2016 09:38
Last Modified: 23 Aug 2019 23:07
URI: http://eprints.lse.ac.uk/id/eprint/68614

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