The Bank Lending Channel and Monetary Policy Rules for European Banks: Further Extensions
The B.E. Journal of Macroeconomics, January 2015
36 Pages Posted: 2 Aug 2012 Last revised: 31 Aug 2016
Date Written: August 1, 2012
The monetary authorities affect the macroeconomic activity through various channels of influence. This paper examines the bank lending channel, which considers how central bank actions affect deposits, loan supply, and real spending. The monetary authorities influence deposits and loan supplies through its main indicator of policy, the real short-term interest rate. This paper employs the endogenously determined target interest rate emanating from the central bank’s monetary policy rule to examine the operation of the bank lending channel. Furthermore, it examines whether different bank-specific characteristics affect how European banks react to monetary shocks. That is, do sounder banks react more to the monetary policy rule than less-sound banks. In addition, inflation and output expectations alter the central bank’s decision for its target interest rate, which, in turn, affect the banking system’s deposits and loan supply. Robustness tests, using additional control variables, (i.e., the growth rate of consumption, the ratio loans to total deposits, and the growth rate of total deposits) support the previous results.
Keywords: Monetary policy rules, bank lending channel, European banks, GMM methodology
JEL Classification: G21, E52, C33
Suggested Citation: Suggested Citation