How monetary policy affects bank lending and financial stability: A ‘credit creation theory of banking’ explanation

Peter Bofinger, Lisa Geißendörfer, Thomas Haas, Fabian Mayer

Recent research has shown that the stance of monetary policy can influence financial stability. This column provides an explanation for the effects of monetary policy on credit growth based on a ‘credit creation theory of banking’. In this framework, ‘funds’ are liquid bank deposits created by the banking system independently of private saving(s). The central bank policy rate has a direct effect on credit supply by influencing the refinancing costs of banks. This provides a clear mechanism through which central banks can influence bank lending and financial stability.

Πηγή: Voxeu

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