Banks' Financial Conditions and the Transmission of Monetary Policy: A Favar Approach

52 Pages Posted: 11 Oct 2010

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2010

Abstract

We propose a novel approach to assess whether banks' financial conditions, as reflected by bank-level information, matter for the transmission of monetary policy, while reconciling the micro and macro levels of analysis. We include factors summarizing large sets of individual bank balance sheet ratios in a standard factor-augmented vector autoregression model (FAVAR) of the French economy. We first find that factors extracted from banks' liquidity and leverage ratios predict macroeconomic fluctuations. This suggests a potential scope for macroprudential policies aimed at dampening the procyclical effects of adjustments in banks' balance sheets structure. However, we also find that fluctuations in bank ratio factors are largely irrelevant for the transmission of monetary shocks. Thus, there is little point monitoring the information contained in bank balance sheets, above the information already contained in credit aggregates, as far as monetary policy transmission is concerned.

Keywords: Monetary Transmission, Credit Channel, Factor Augmented Vector Autoregression (FAVAR)

JEL Classification: E44, E52, G21

Suggested Citation

Jimborean, Ramona and Mésonnier, Jean-Stéphane, Banks' Financial Conditions and the Transmission of Monetary Policy: A Favar Approach (September 1, 2010). Banque de France Working Paper No. 291, Available at SSRN: https://ssrn.com/abstract=1690563 or http://dx.doi.org/10.2139/ssrn.1690563

Ramona Jimborean (Contact Author)

Banque de France ( email )

Paris
France

Jean-Stéphane Mésonnier

affiliation not provided to SSRN ( email )

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