Transmission of Monetary Policy Shocks in Finland: Evidence from Bank Level Data on Loans

Abstract

We use a panel of quarterly time series observations spanning the period from 1995 to 2000 on Finnish banks to estimate reduced form equations for the growth rate of bank loans. By allowing for individual bank specific effects in the models that we estimate we specifically seek evidence of a bank-lending channel for the transmission of monetary policy shocks in Finland during the latter half of the 1990s. On the basis of our estimation results, we conclude that there is at most weak evidence in favour of the bank-lending channel for monetary policy shocks. Since our data overlaps with the post crisis recovery of the Finnish banking sector with specific government support measures still active during the good part of the sample period, we try to capture the effects of these measures through incorporating a policy dummy variable in our empirical model. This policy dummy enters the estimated equations highly significantly, suggesting that the measures themselves may have contributed to the growth rate of bank loans during the sample period.

Keywords: Monetary policy, money view, credit view, banking crisis, GMM

JEL Classification: E51, E52, G21