Relationship Banking and Monetary Policy Transmission: Evidence from India
49 Pages Posted: 17 Nov 2015 Last revised: 21 Aug 2017
Date Written: November 16, 2015
Though the monetary policy transmission and financial intermediation literatures have respectively highlighted the role of the “bank credit channel” and relationship banking, the effect of relationship banking on the transmission of monitory policy has not been investigated. In this paper, we study the impact of relationship banking on the transmission of monitory policy. Theoretically, relationship banking could ameliorate or exacerbate the effects of monetary policy shocks. Using a sample of bank dependent firms in India, we find that firms that enjoy an exclusive banking relationship are less susceptible to monetary policy shocks than firms that engage in transactional banking. The effects are symmetric across monetary policy tightening and loosening. We conjecture that reduced information asymmetry due to relationship banking blunts the impact of “firm balance sheet channel” of monitory policy transmission.
Keywords: banks, monetary policy, central banks and their policies
JEL Classification: G21, E52, E58
Suggested Citation: Suggested Citation