We analyse the impact on the euro area economy of the ECB's non-standard monetary policy measures by studying the effect of the expansion of intermediation of interbank transactions across the central bank balance sheet. We exploit data drawn from the aggregated Monetary and Financial Institutions (MFI) balance sheet, which allows us to construct a measure of the 'policy shock' represented by the ECB's increasing role as a financial intermediary. We find small but significant effects both on loans and real economic activity. The interbank market is central to the entire financial system: in normal times, it is the main venue for banks to obtain short-term financing. The seizing up of the interbank market therefore threatened financial stability more widely and, through its effect on liquidity and credit availability, also macroeconomic performance.To prevent these malicious effects, the ECB stepped in with a series of measures designed to allow banks to continue to obtain short-term finance even while the money market was dysfunctional.Two crucial elements of the ECB initiatives in 2008 were: First, to adopt a 'fixed rate / full allotment' tender procedure in its operations, which allowed banks to get access to a potentially unlimited amount of financing from central bank operations at a low and predictable borrowing rate, provided that they post sufficient amounts of eligible collateral; and second, to broaden the collateral eligible for those operations, such that the freezing in some market segments would not lead to a shortage of collateral for Eurosystem operations.We characterise these measures as facilitating an expansion of the intermediation of bankto-bank transactions across the ECB balance sheets, which could substitute for the normal transactions in the money market that were no longer taking place.In this paper, we can explore this substitution more directly than in previous work, since we exploit data drawn from the aggregate Monetary and Financial Institutions (MFI) balance sheet. These data allow us to identify both: (a) transactions between banks; and (b) transactions between banks and the ECB. We show that the latter grew following the introduction of non-standard measures, while the former declined. 3 We use this analysis to explore the macroeconomic implications of the ECB's measures.We demonstrate that, by ensuring banks maintained access to short-term financing, the measures avoided a collapse of liquidity and credit. In turn, this helped to sustain economic activity.More specifically, we find that bank loans to households and, in particular, to non-financial corporations are higher than would have been the case without the ECB's intervention.In turn, the ECB's support has a significant impact on economic activity: according to the analysis presented in this paper, two and a half years after the failure of Lehman Brothers, the level of industrial production is estimated to be 2% higher, and the unemployment rate 0.6 percentage points lower, than would have been the case in the ab...
