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The role of liquidity in monetary policy transmission: Evidence from Indian banks

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  • Md Gyasuddin Ansari
  • Rudra Sensarma

Abstract

The role of bank liquidity in monetary policy transmission has received insufficient attention in the literature. Faced with monetary tightening, banks with more liquidity can sell off securities and protect their loan portfolios. We test this proposition using panel data for Indian banks during 2005–2020. Employing dynamic threshold panel regressions with liquid assets as the threshold variable, we show that bank lending declines with monetary policy tightening in low liquidity regimes, but not in high liquidity regimes. We also find evidence for different portfolio reallocation behaviour by banks in high versus low liquidity regimes in response to monetary policy changes.

Suggested Citation

  • Md Gyasuddin Ansari & Rudra Sensarma, 2023. "The role of liquidity in monetary policy transmission: Evidence from Indian banks," Scottish Journal of Political Economy, Scottish Economic Society, vol. 70(5), pages 439-458, November.
    • Handle: RePEc:bla:scotjp:v:70:y:2023:i:5:p:439-458
    DOI: 10.1111/sjpe.12347
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