Unconventional monetary policy and the credit channel in the euro area

We disentangle credit supply and demand and we then embed this information into a Bayesian threshold VAR model to investigate the importance of the demand channel and the broad credit channel in the transmission of unconventional monetary policy on the macroeconomy during financial stress periods. We find that during such periods, UMP shocks boost aggregate demand for loans, increase agents’ net worth and revitalize credit to firms and households. In addition, counterfactual analysis suggests that non-standard policy measures aiming at stimulating loan demand and relaxing banks’ balance sheet constraints would provide a significant support to economic activity, prices and the financial sector.