In response to the 2008-2009 crisis, faced with distressed financial intermediaries, the ECB embarked in long-term refinancing operations (LTROs). Using an estimated DSGE model with a frictional banking sector, we find that such liquidity injections can have large macroeconomic effects, with multipliers up to 0.5. However, the latter depend in an important way on how standard monetary policy is adjusted in conjunction with these non-standard measures. We find that the effects are larger when the separation principle is breached, that is to say when we force monetary policy not to react to the stimulative effects of LTROs.
Christophe Cahn, Julien Matheron and Jean-Guillaume Sahuc
Classification JEL : E32, E58
Keywords : Financial frictions, unconventional monetary policy, long-term refinancing operations, DSGE model.
Updated on: 06/12/2018 11:00