Borrowers' Financial Constraints and the Transmission of Monetary Policy: Evidence from Financial Conglomerates

41 Pages Posted: 31 Jul 2006

See all articles by Adam B. Ashcraft

Adam B. Ashcraft

Federal Reserve Bank of New York

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Date Written: August 2002

Abstract

Building on recent evidence concerning the functioning of internal capital markets in financial conglomerates, we conduct a novel test of the balance-sheet channel of monetary policy. Specifically, we investigate how the response of lending to monetary policy differs across small banks that are affiliated with the same bank holding company but operate in different geographical areas. These banks face similar constraints in accessing internal and external sources of funds, but have different pools of borrowers. Because they typically concentrate their lending with small local businesses, we can exploit cross-sectional differences in local economic indicators at the time of a policy shock to study whether the strength of borrowers' balance sheets affects the response of bank lending. We find evidence that the negative response of bank loan growth to a monetary contraction is significantly stronger when borrowers have weaker balance sheets.

Keywords: balance sheet channel, internal capital markets

JEL Classification: E50, E51, G22

Suggested Citation

Ashcraft, Adam B. and Campello, Murillo, Borrowers' Financial Constraints and the Transmission of Monetary Policy: Evidence from Financial Conglomerates (August 2002). FRB of New York Staff Report No. 153. Available at SSRN: https://ssrn.com/abstract=920679 or http://dx.doi.org/10.2139/ssrn.920679

Adam B. Ashcraft (Contact Author)

Federal Reserve Bank of New York ( email )

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Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

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Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138

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