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Banking Conditions and the Effects of Monetary Policy: Evidence from U.S. States

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  • Van den Heuvel Skander J.

    (Federal Reserve Board)

Abstract

Using data from U.S. states, this paper examines empirically how the effects of monetary policy on output depend on banking conditions. I find that when a state’s banking sector starts out with a low capital-asset ratio, its subsequent lending and output growth are both more sensitive to changes in the federal funds rate or other indicators of monetary policy. This result is consistent with the existence of a ‘bank capital channel’ as well as a conventional bank lending channel. Other evidence favors the capital channel, as bank liquidity is not associated with variation in the impact of monetary policy on output at the state level. Consistent with the theory, the importance of state-level measures of bank capital weakens significantly after the removal of regulatory barriers to interstate banking.

Suggested Citation

  • Van den Heuvel Skander J., 2012. "Banking Conditions and the Effects of Monetary Policy: Evidence from U.S. States," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(2), pages 1-31, March.
    • Handle: RePEc:bpj:bejmac:v:12:y:2012:i:2:n:5
    DOI: 10.1515/1935-1690.2411
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    2. Coulier, Lara & Pancaro, Cosimo & Reghezza, Alessio, 2024. "Are low interest rates firing back? Interest rate risk in the banking book and bank lending in a rising interest rate environment," Working Paper Series 2950, European Central Bank.
    3. Mr. Tümer Kapan & Ms. Camelia Minoiu, 2013. "Balance Sheet Strength and Bank Lending During the Global Financial Crisis," IMF Working Papers 2013/102, International Monetary Fund.
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    5. Abuka, Charles & Alinda, Ronnie K. & Minoiu, Camelia & Peydró, José-Luis & Presbitero, Andrea F., 2019. "Monetary policy and bank lending in developing countries: Loan applications, rates, and real effects," Journal of Development Economics, Elsevier, vol. 139(C), pages 185-202.
    6. Charles Abuka & Ronnie K Alinda & Ms. Camelia Minoiu & José-Luis Peydró & Mr. Andrea F Presbitero, 2015. "Monetary Policy in a Developing Country: Loan Applications and Real Effects," IMF Working Papers 2015/270, International Monetary Fund.
    7. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 3. How Do Structural Policies Affect Financial Crisis Risk?: Evidence from Past Crises Across OECD and Emerging Economies," OECD Economics Department Working Papers 966, OECD Publishing.
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    9. Lopez-Buenache, German, 2019. "The evolution of monetary policy effectiveness under macroeconomic instability," Economic Modelling, Elsevier, vol. 83(C), pages 221-233.
    10. Melesse Wondemhunegn Ezezew, 2015. "Small DSGE Model with Financial Frictions," Working Papers 2015:20, Department of Economics, University of Venice "Ca' Foscari".
    11. English, William B. & Van den Heuvel, Skander J. & Zakrajšek, Egon, 2018. "Interest rate risk and bank equity valuations," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 80-97.
    12. Sáiz, María Cantero & Azofra, Sergio Sanfilippo & Olmo, Begoña Torre & Gutiérrez, Carlos López, 2018. "A new approach to the analysis of monetary policy transmission through bank capital," Finance Research Letters, Elsevier, vol. 24(C), pages 95-104.
    13. Andreas Beyer & Benoît Coeuré & Caterina Mendicino, 2017. "Foreword – The crisis, ten years after: Lessons learnt for monetary and financial research," Economie et Statistique / Economics and Statistics, Institut National de la Statistique et des Etudes Economiques (INSEE), issue 494-495-4, pages 45-64.
    14. Peydró, José-Luis & Abuka, Charles & Alinda, Ronnie & , & Minoiu, Camelia, 2017. "Financial Development and Monetary Policy: Loan Applications, Rates, and Real Effects," CEPR Discussion Papers 12171, C.E.P.R. Discussion Papers.
    15. Peter Paz, 2022. "Bank capitalization heterogeneity and monetary policy," Working Papers 2234, Banco de España.
    16. MD Gyasuddin Ansari & Rudra Sensarma, 2023. "Monetary Policy, Liquidity Shock and Bank lending: The Case of Currency Demonetization in India," Working papers 575, Indian Institute of Management Kozhikode.
    17. Ahrend, Rudiger & Goujard, Antoine, 2015. "Global banking, global crises? The role of the bank balance-sheet channel for the transmission of financial crises," European Economic Review, Elsevier, vol. 80(C), pages 253-279.

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