We examine the interplay between monetary policy, bank risk-taking, and financial stability in a New Keynesian model with endogenous bank risk-taking and systemic crises. Banks' access to leverage depends on their charter value, which is itself affected by movements in the real interest rate. We find that permanent shifts in the long-term real interest rate have a significant impact on bank leverage and on banks' investments in systemically risky assets, while transitory movements have a more limited impact. We show that in the presence of systemic risk-taking, the systematic component of monetary policy faces a trade-off between price stability and financial stability. A moderate reaction to inflation deviations from the target is optimal, as it sustains banks' equity value after financial crises. Seeking price stability reduces inflation volatility but leads to increased systemic risk-taking and more severe financial recessions. The optimal central bank policy combination involves an increase in regulatory bank capital requirements coupled with a moderate reaction of monetary policy to inflation.

We explore empirically the cost channel of monetary policy transmission during the recent period of monetary policy tightening in the euro area. We use unique data on firms’ selling price expectation from the Survey on the Access to Finance of Enterprises (SAFE), combined with information on firms’ borrowing from the euro area-wide credit register (AnaCredit) and ECB monetary policy surprises. We find that firms revise upwards their one-year ahead selling price expectations following monetary announcements in a tightening cycle and this effect depends on firms’ working capital exposure. The paper provides evidence on the cost channel of monetary policy, adding to our understanding of the monetary policy transmission to firms in the euro area.

The Czech Republic provides a unique setting to examine the effects of loan moratoria during the COVID-19 pandemic, as it combined broad-access legislative moratoria with stricter, eligibility-based bank moratoria. Using detailed loan-level data from the Czech mortgage market, we find that legislative moratoria were predominantly precautionary, addressing a wide range of borrowers, whereas bank moratoria were primarily utilized by higher-risk borrowers facing solvency challenges. Post-moratoria, we observe limited materialization of credit risk, which was nearly twice as high for bank moratoria compared to legislative moratoria. Stricter borrower-based regulations (LTV, DTI, and DSTI limits) implemented prior to the pandemic were associated with lower moratoria uptake and reduced post-moratoria arrears. These findings underscore the effectiveness of combining universal legislative moratoria with targeted bank measures to balance immediate economic relief and long-term financial stability.

Is there a policy lever that individual countries in a monetary union can pull to increase monetary policy transmission through banks? In this paper, we study the effects of a government policy that significantly increased term deposit rates and spurred competition for deposits across the banking system through unexpected unilateral increases in deposit rates by state-owned banks in Croatia, an euro area (EA) member. Using detailed micro-level data, including confidential bank records and tax authority transaction data, we examine how the policy—intended to boost savings and reduce consumption—affected deposit flows, lending, and housing purchases. Findings reveal that while competing banks adjusted rates promptly, mitigating deposit outflows, consumption remained largely unchanged, consistent with low intertemporal elasticity of substitution. However, increased deposit yields prompted households, especially those with substantial liquid wealth, to rebalance portfolios away from housing toward term deposits. Loan supply was unaffected due to ample bank liquidity.