The Bank Lending Channel Revisited
Puey Ungphakorn Institute for Economic Research, Bank of Thailand
July, 14 2011
Journal of Money, Credit and Banking, Vol. 43, Issue 4, pp. 711-734, June 2011
A central proposition in research on the role of banks in the transmission mechanism is that monetary policy imparts a direct impact on deposits and that deposits act as the driving force of bank lending. This paper argues that the emphasis on policy-induced changes in deposits is misplaced. A reformulation of the bank lending channel is proposed that works primarily through the impact of monetary policy on banks’ balance sheet strength and risk perception. Such a recasting implies, contrary to conventional wisdom, that greater reliance on market-based funding enhances the importance of the channel.
Keywords: monetary policy, bank lending channel, bank capital, credit, money
JEL Classification: E40, E44, E51, E52, E58
Date posted: July 16, 2011