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The effect of liquidity shocks on the bank lending channel: Evidence from India

Author

Listed:
  • Mishra, Ankita
  • Burns, Kelly

Abstract

Using a structural VAR framework and unique bank liquidity index, this study builds a short run model to analyse dynamic interactions among monetary policy, bank liquidity, and bank lending in India. We find that monetary policy shocks have strong initial and persistent impacts on bank lending, while liquidity shocks impact bank lending after a 9-month lag. We also find evidence of an indirect feedback channel between monetary policy and bank lending operating through changes in bank liquidity. However, the indirect effect of monetary policy on bank lending (through bank liquidity) operates with a lag of roughly 6–9 months.

Suggested Citation

  • Mishra, Ankita & Burns, Kelly, 2017. "The effect of liquidity shocks on the bank lending channel: Evidence from India," International Review of Economics & Finance, Elsevier, vol. 52(C), pages 55-76.
    • Handle: RePEc:eee:reveco:v:52:y:2017:i:c:p:55-76
    DOI: 10.1016/j.iref.2017.09.011
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    Citations

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    Cited by:

    1. Sadhan Kumar Chattopadhyay & Arghya Kusum Mitra, 2023. "Monetary policy transmission in India under the base rate and MCLR regimes: a comparative study," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-14, December.
    2. Li, Shuai & Zhan, Shuwei & Zhan, Shurui & Zhan, Minghua, 2023. "How does financial development change the effect of the bank lending channel of monetary policy in developing countries?—Evidence from China," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 502-519.
    3. Rakshit, Bijoy & Bardhan, Samaresh, 2023. "Does bank competition affect the transmission mechanism of monetary policy through bank lending channel? Evidence from India," Journal of Asian Economics, Elsevier, vol. 86(C).
    4. Soedarmono, Wahyoe & Gunadi, Iman & Pambudi, Sudiro & Nurhayati, Tika, 2023. "Monetary policy, funding liquidity, and undisbursed loans in Indonesia: The bank lending channel revisited," Journal of Economics and Business, Elsevier, vol. 127(C).
    5. Nguyen, Canh Phuc & Le, Thai-Ha & Su, Thanh Dinh, 2020. "Economic policy uncertainty and credit growth: Evidence from a global sample," Research in International Business and Finance, Elsevier, vol. 51(C).
    6. Sadeghzadeh Yazdi , Ali & Abounoori , Esmaiel & Erfani , Alireza, 2018. "Modeling the Liquidity Gap in a Private Bank," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 13(2), pages 153-176, April.
    7. Md Gyasuddin Ansari & Rudra Sensarma, 2021. "Response of Bank Lending to Monetary Policy in India: Does Liquidity Matter?Abstract: We examine the role of bank liquidity in monetary policy transmission in India. We apply threshold panel regressio," Working papers 428, Indian Institute of Management Kozhikode.

    More about this item

    Keywords

    Liquidity index; Monetary policy shocks; SVAR;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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