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The impact of monetary policy and banks' balance sheets: some international evidence

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  • Philippe Bacchetta
  • Fernando Ballabriga

Abstract

There has been extensive empirical research on the role of credit markets in the transmission of US monetary policy, but the evidence for other countries is scarce. This paper compares the US experience with a set of 13 European countries by examining monetary VARs including banks' balance sheets in the spirit of Bernanke and Blinder (1992). It is shown that the VAR methodology provides plausible results for interpreting interest rate shocks as monetary policy shocks in most countries. The evolution of bank lending after a monetary contraction is then analysed. For most countries, it is shown that bank loans decline more than money in the medium run. In the short run, however, loans are sticky and react less than money. Also, loans and output responses to an increase in interest rate tend to be more synchronized than those of money and output. This evidence is similar to the US and is consistent with the broad credit channel of monetary policy.

Suggested Citation

  • Philippe Bacchetta & Fernando Ballabriga, 2000. "The impact of monetary policy and banks' balance sheets: some international evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 10(1), pages 15-26.
    • Handle: RePEc:taf:apfiec:v:10:y:2000:i:1:p:15-26
    DOI: 10.1080/096031000331888
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    References listed on IDEAS

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    1. Martina Copelman & Alejandro M. Werner, 1995. "The monetary transmission mechanism in Mexico," International Finance Discussion Papers 521, Board of Governors of the Federal Reserve System (U.S.).
    2. Daniel L. Thornton, 1996. "Identifying the liquidity effect: the case of nonborrowed reserves," Working Papers 1996-002, Federal Reserve Bank of St. Louis.
    3. Gerlach, Stefan & Smets, Frank, 1995. "The Monetary Transmission Mechanism: Evidence from the G-7 Countries," CEPR Discussion Papers 1219, C.E.P.R. Discussion Papers.
    4. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-931, November.
    5. Daniel L. Thornton, 1994. "Financial innovation, deregulation and the \\"credit view\\" of monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 31-49.
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    Cited by:

    1. Diemo Dietrich, 2003. "Monetary Policy Shocks and Heterogeneous Finance Decisions: A Model of Hidden Effort Choice and Financial Intermediation," German Economic Review, Verein für Socialpolitik, vol. 4(3), pages 365-388, August.
    2. Abdullahi Osman Ali, 2021. "Impact of Monetary Policy Fluctuations on Conventional and Islamic Banks in Malaysia: Evidence from ARDL Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 11(1), pages 101-108.
    3. repec:lan:wpaper:935 is not listed on IDEAS
    4. P N Snowden & M A Salisu & N Taher, 2000. "Oiling the wheels: credit and monetary neutrality in Saudi Arabia," Working Papers 539748, Lancaster University Management School, Economics Department.
    5. Giulioni, Gianfranco, 2015. "Policy interest rate, loan portfolio management and bank liquidity," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 52-74.
    6. Keshab Bhattarai, 2008. "An empirical study of interest rate determination rules," Applied Financial Economics, Taylor & Francis Journals, vol. 18(4), pages 327-343.
    7. repec:bla:germec:v:4:y:2003:i::p:365-388 is not listed on IDEAS
    8. repec:lan:wpaper:922 is not listed on IDEAS
    9. van Holle, Frederiek, 2017. "Essays in empirical finance and monetary policy," Other publications TiSEM 30d11a4b-7bc9-4c81-ad24-5, Tilburg University, School of Economics and Management.

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