Abstract
This paper studies the effect of central bank collateral policy on bank credit supply and the real economy. In 2007, the European Central Bank replaced national collateral lists with a single list valid across the euro area. Banks holding newly eligible assets experienced a reduction in their cost of funding. Consequently, they lent more compared to banks without such assets, and they extended more loans to riskier and less productive borrowers located in other euro area countries. These borrowers in turn experienced a growth in employment and investment. The results highlight the role of financial integration in fueling cross-border credit booms.
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