This study attempts to evaluate the impact of an increase in banks’ funding stress and its transmission to the real economy, taking into account different funding sources banks can rely on. Using aggregate data from eight Euro area financial systems, we find that following a liquidity funding shock, both credit and GDP decline in different amounts and lengths. GDP reverts faster than credit. Furthermore, periphery countries experience a more pronounced fall in deposits and credit growth and the negative effects from the shock last longer than in core countries. Banks’ funding seems to play a relevant role as periphery countries rely more on wholesale funding during normal times.
Liquidity funding shocks ECB policy Panel VAR
E50 E58 F45
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The authors would like to thank participants at the 6th International Conference of the Financial Engineering and Banking Society for helpful discussions. We also thank two anonymous referees as well as the invited editor Ned Prescott for their insightful comments. Finally, we are grateful to Marta González Escalonilla for excellent research assistance.
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