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Effects of credit restrictions in the Netherlands on credit growth and inflation

Published online by Cambridge University Press:  22 July 2021

Gabriele Galati ,
Jan Kakes  and
Richhild Moessner
Gabriele Galati*
Affiliation:
De Nederlandsche Bank
Jan Kakes*
Affiliation:
De Nederlandsche Bank
Richhild Moessner*
Affiliation:
Bank for International Settlements and CESifo
*
Corresponding author: Richhild Moessner, Bank for International Settlements, Centralbahnplatz 2, 4002Basel, Switzerland, email: richhild.moessner@bis.org; Gabriele Galati, email: e.b.g.galati@dnb.nl; Jan Kakes, De Nederlandsche Bank, email: j.i.kakes@dnb.nl.
Corresponding author: Richhild Moessner, Bank for International Settlements, Centralbahnplatz 2, 4002Basel, Switzerland, email: richhild.moessner@bis.org; Gabriele Galati, email: e.b.g.galati@dnb.nl; Jan Kakes, De Nederlandsche Bank, email: j.i.kakes@dnb.nl.
Corresponding author: Richhild Moessner, Bank for International Settlements, Centralbahnplatz 2, 4002Basel, Switzerland, email: richhild.moessner@bis.org; Gabriele Galati, email: e.b.g.galati@dnb.nl; Jan Kakes, De Nederlandsche Bank, email: j.i.kakes@dnb.nl.
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Abstract

Credit restrictions were used as a monetary policy instrument in the Netherlands from the 1960s to the early 1990s. Since these restrictions were aimed at containing money rather than credit growth, their focus was on net credit creation by the financial sector. We document the rationale of these credit restrictions and how their implementation evolved in line with the evolution of the financial system. We study the impact on the balance sheet structure of banks and other financial institutions. We find that banks mainly responded to credit restrictions by making adjustments to the liability side of their balance sheets, particularly by increasing the proportion of long-term funding. Responses on the asset side were limited, while part of the banking sector even increased lending after the adoption of a restriction. These results suggest that banks and financial institutions responded by switching to long-term funding to meet the restriction and shield their lending business. Arguably, the credit restrictions were therefore still effective in reaching their main goal. Indeed, we do find evidence of a significant effect of credit restrictions on inflation.

Keywords

credit restrictionsmonetary policy

JEL classification

E51: Money Supply • Credit • Money Multipliers E42: Monetary Systems • Standards • Regimes • Government and the Monetary System • Payment Systems E52: Monetary Policy E58: Central Banks and Their Policies G28: Government Policy and Regulation
Type
Articles
Information
Financial History Review , Volume 28 , Issue 2 , August 2021 , pp. 237 - 258
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Copyright
Copyright © The Author(s), 2021. Published by Cambridge University Press on behalf of the European Association for Banking and Financial History

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Footnotes

We would like to thank Bill Allen, Peter van Els, Benoit Mojon, Christian Upper, Sweder van Wijnbergen, the journal editor, two anonymous referees and participants at a seminar at De Nederlandsche Bank for useful comments and discussions. Dirk van der Wal and Pieter Stam provided access to DNB's historical monetary time series. The views expressed are those of the authors and do not necessarily reflect those of De Nederlandsche Bank or the BIS.

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