credit and that are able to generate relatively large real effects even with relatively small monetary policy changes. the main amplification mechanisms operating via banks are the balance sheet channel, the bank lending channel and the risk - taking channel. the balance - sheet channel of monetary policy predicts that a policy rate hike tends to compress asset prices and weaken activity, thus lowering the net worth of borrowers. [ 3 ] this translates into a reduced capacity to raise external funding for firms : the increase in the external finance premium faced by borrowers due to a decline in net worth and pledged collateral decreases spending and investment by more than what is predicted by a short - term policy rate change in a framework abstracting from the balance sheet channel. the same channel also affects households whose net worth is closely linked to house prices. the lower value of collateral during a policy tightening therefore triggers higher credit risk and tighter credit conditions for both firms and households. the bank - lending channel focuses on the impact of policy tightening on the supply of bank loans to the economy. first, the supply of loans offered by banks is adversely affected by monetary policy tightening via an increase in bank funding costs. [ 4 ] second, borrower - lender agency costs further reduce the willingness of banks to lend during periods of higher monetary policy rates or lower economic activity. third, bank balance sheet constraints amplify the contraction in credit availability brought about by policy tightening. [ 6 ] broadly speaking, higher interest rates increase the opportunity cost of holding the most liquid assets – overnight deposits – compared with less liquid assets such as term deposits or securities. moreover, the unwinding of asset purchases and long - term refinancing operations currently lead to a direct decline in the liquidity available to banks, limiting their capacity to supply credit. the third amplification mechanism is the risk - taking channel of monetary policy. [ 8 ] this is the channel through which banks are incentivised to make riskier investments in an environment of lower interest rates, which reduces incentives to engage in costly monitoring. [ 9 ] in addition, asset purchases programmes extract duration risk from the market, increasing the relative attractiveness of riskier investments and therefore triggering a portfolio rebalancing that ultimately leads to a reallocation towards real investments. [ 10 ] as such, during the period of highly accommodative monetary policy, this may have led banks to build up a stock of risky investments. the opposite dynamic may not be operating, as declining

conditions is even more remarkable in view of the highly accommodative loan supply environment in the years before the pandemic. credit supply restrictions typically lead to a significant drop in real economic activity. augmenting a macrofinancial empirical model with the lsi indicates that a credit supply shock leading to a 1 percentage point decline in loan volumes results in a 0. 3 percentage point reduction in real gdp ( chart 8 ). a meta - analysis shows that this quantification is in line with the results of other empirical studies that use different models and cover different sample periods and jurisdictions. overall, the results indicate that a credit supply shock leads to a contraction in the volume of credit intermediated by banks that in turn generates a substantial reduction in output, compared to the baseline path. chart 8 the impact of credit supply shocks on real gdp ( percentage points ) sources : gilchrist, s. and zakrajsek, e. ( 2011 ) ; barnett, w. a. and thomas, r. l. ( 2014 ) ; mumtaz, h., pinter, g., and theodoridis, k. ( 2018 ) ; basset, c. et al. ( 2014 ) ; altavilla, c., darracq paries, m., and nicoletti, g. ( 2019 ) ; chen, k., higgins, p., and zha, t. ( 2021 ) ; gambetti, l. and musso, a. ( 2017 ) ; mendicino, c. et al. ( 2019 ) ; jermann, u. and quadrini, v. ( 2012 ) ; gerali, a. et al. ( 2010 ) ; darracq paries, m., kok sorensen, c., and rodriguez - palenzuela, d. ( 2011 ) ; world economic outlook, imf ( 2023 ) ; barauskaite, i. et al. ( 2022 ) ; moccero, d. n., darracq paries, m., and maurin, l. ( 2014 ) ; ciccarelli, m., maddaloni, a., and peydro, j. - l. ( 2015 ). notes : the chart shows the distribution of the impact on real gdp of a credit supply shock across studies. the vertical line represents the estimate obtained by using the lsi as an external