The Combined Effect of CCyB Release and Monetary Policy Easing Theory and Evidence Based on the COVID-19 Crisis

45 Pages Posted: 5 May 2023

See all articles by Cristina Jude

Cristina Jude

Banque de France - Economic Study and Research Division; University of Orleans - Laboratoire d'économie d'Orléans

Grégory Levieuge

University of Orleans - Laboratoire d'Economie d'Orleans; Banque de France

Multiple version iconThere are 2 versions of this paper

Date Written: May 5, 2023

Abstract

At the height of the COVID-19 crisis, many countries have reduced their countercyclical capital buffer (CCyB) for the first time since its implementation, while also easing monetary policy. In this paper, we exploit this quasi-natural experiment to gauge the combined effects of these two policies on bank lending rates (BLRs). Our analysis first relies on a dynamic macroeconomic model embedding a banking sector with financial frictions. We theoretically show that the joint action of CCyB release and monetary easing lowers BLRs by more than the sum of their individual effects. We then empirically confirm this finding by a difference-in-difference analysis comparing countries that released their CCyB with countries that did not. On average, for one percentage point release of the CCyB, corporate BLRs decreased by around 11 basis points more in countries with a CCyB release. The effect is stronger for economies close to their effective lower bound. Mortgage rates also reacted to CCyB release, but to a much smaller extent. Finally, the CCyB relief also improved the pass-through of monetary policy to lending rates.

Keywords: Countercyclical capital buffer, Monetary policy, Policy complementarity, Lending rates, COVID-19

JEL Classification: G21, G28, E52, E44

Suggested Citation

Jude, Cristina and Levieuge, Grégory, The Combined Effect of CCyB Release and Monetary Policy Easing Theory and Evidence Based on the COVID-19 Crisis (May 5, 2023). Available at SSRN: https://ssrn.com/abstract=4439353 or http://dx.doi.org/10.2139/ssrn.4439353

Cristina Jude (Contact Author)

Banque de France - Economic Study and Research Division ( email )

31, rue Croix des Petits Champs
75049 Paris Cedex 01
France
+33142977735 (Phone)

University of Orleans - Laboratoire d'économie d'Orléans ( email )

Rue de Blois BP6739
Orléans cedex 2, Centre 45067
France

Grégory Levieuge

University of Orleans - Laboratoire d'Economie d'Orleans ( email )

Rue de Blois
Orléans, Centre 45100
France

Banque de France ( email )

Paris
France

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