The Reaction of Bank Lending to Monetary Policy Measures in Germany

Abstract:     
A crucial condition for the existence of a credit channel through bank loans is that monetary policy should be able to change bank loan supply. This paper contributes to the discussion on this issue by presenting empirical evidence from dynamic panel estimations based on a dataset that comprises individual balance sheet information on all German banks. It shows that the average bank reduces its lending more sharply in reaction to a restrictive monetary policy measure the lower its ratio of short-term interbank deposits to total assets. A dependence on its size can only be found if explicitly controlled for this dominating effect and/or if the very small banks are excluded. Overall, the evidence is compatible with the existence of a credit channel.

Number of Pages in PDF File: 47

Keywords: monetary policy transmission, financial structure, credit channel, dynamic panel

JEL Classification: C23, E52, G21

working papers series